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How Central Should the Central Bank Be?

  • Alan S. Blinder

The nature and scope of the Federal Reserve's authority and the structure of its decision making are now "on the table" to an extent that has not been seen since 1935, and the Fed's vaunted independence is under some attack. This essay asks what the Federal Reserve should -- and shouldn't -- do, leaning heavily on the concept of economies of scope. In particular, I conclude that the central bank should monitor and regulate systemic risk because preserving financial stability is (a) closely aligned with the standard objectives of monetary policy and (b) likely to require lender of last resort powers. I also conclude that the Fed should supervise large financial institutions because that function is so closely to regulating systemic risk. However, several other functions now performed by the Fed could easily be done elsewhere. ( JEL E52, E58, G21, G28)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jel.48.1.123
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Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 48 (2010)
Issue (Month): 1 (March)
Pages: 123-133

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Handle: RePEc:aea:jeclit:v:48:y:2010:i:1:p:123-133
Note: DOI: 10.1257/jel.48.1.123
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  1. Allen N. Berger & Anil K. Kashyap & Joseph M. Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trips It's Been," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 55-218.
  2. Alan S. Blinder, 2000. "Central-Bank Credibility: Why Do We Care? How Do We Build It?," American Economic Review, American Economic Association, vol. 90(5), pages 1421-1431, December.
  3. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
  4. Daron Acemoglu & Simon Johnson & Pablo Querubin & James A. Robinson, 2008. "When Does Policy Reform Work? The Case of Central Bank Independence," NBER Working Papers 14033, National Bureau of Economic Research, Inc.
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