Central Banks’ Expanding Mandates Raise Independence QuestionsBy and
Bank oversight, financial stability creep on to-do lists
Policy makers, academics discuss at conference in Vienna
Central banks aren’t what they used to be, and that might have implications for their independence.
The financial crisis and its aftermath thrust monetary officials into the spotlight of international policy-making as they took unprecedented steps to prevent market and economic meltdowns. In some cases, that meant giving them responsibilities that go well beyond guaranteeing price stability, the primary mandate for most central banks.
As economies around the world struggle to pull away from the years of stagnant growth and low inflation, policy makers and academics at a conference hosted by the Austrian central bank in Vienna on Tuesday discussed how those newly acquired tasks and unconventional tools will change the institutions. It may be that broader powers attract greater public scrutiny.
“Society may now be asking more of central banks, and central banks will now try to find a way to serve those goals,” said Alan M. Taylor, a economics professor at the University of California in Davis. “Central banks can therefore expect to become less independent and more politicized going forward, and to some extent this is already happening.”
The European Central Bank is an example of the mission creep. In addition to setting monetary policy for a 19-nation currency bloc that reaches from Finland in the north to Malta in the south, the institution has since 2014 also been responsible for banking supervision.
Financial stability is one area where lines can blur. Riksbank Deputy Governor Cecilia Skingsley said at the conference that there’s still no international consensus on how best to allocate responsibilities between legislators and other authorities.
“We need to create balance between, on the one hand, the desire of the legislator to give the central bank a clear mission and mandate, and, on the other, the scope of the central bank to perform its tasks independently and flexibly,” she said.
Delegates also acknowledged that limits to their freedom to act can come from the globalized economy, with monetary policy in one country impacting others. Smaller advanced economies like Switzerland and emerging markets like Brazil have experienced spillover effects from unconventional policies in major developed nations.
Not in Isolation
“Central banks never operate in isolation,” said ECB Governing Council member Ewald Nowotny, the head of the Austrian central bank. “As policy makers, we have to take care that the necessary stimulating effect of expansive monetary policies does not so much come from increased net exports, but rather from a strengthening of domestic demand.”
A chief criticism of central banks is that the more they do to stave off deflation -- with tools such as negative interest rates quantitative easing -- and reinvigorate their economies, the closer they move to fiscal policy. That could lead to a “rapid evolution, or perhaps revolution” of central-bank mandates, said Taylor.
“We could have broader asset purchases, attempts to abolish cash, go more negative, use of digital currency, helicopter money, fiscal and monetary coordination,” he said. “Not all of these sound attractive to me and I’m pretty sure not all of them sound attractive to you, but the fact that we’re even having a conversation about them suggests how desperate the times are.”
— With assistance by Boris Groendahl