The Future of Central Banking

A central bank will usually be primarily concerned about three aspects of stability. These are the maintenance of:- (1) domestic price stability, (2) external stability of the value of the currency, and (3) overall systemic stability in the financial system. These three objectives are not, of course, independent. For example, failure to achieve (1) or (3) will adversely affect the other two objectives. Again domestic price stability (1) may, under certain regimes, be a desired by-product of pegging, linking, or fixing the currency to another currency, or basket of currencies. With only one main instrument, the short-term interest rate, a central bank can focus primarily either on the domestic, or the external, stability of the currency, but not on both simultaneously. We shall discuss later whether there may be other, secondary, instruments that a central bank can also deploy. Nevertheless we shall consider these three functions of central banks in turn and separately. We shall report the remarkable degree of consensus about the way in which a central bank can and should pursue domestic price stability; the greater degree of uncertainty about whether, and how, external stability of exchange rates can also be attained; and finally the many differences of view about the appropriate ambit for a central bank to achieve systemic financial stability.