Central Banks: Gatekeepers of Monetary Stability and Guardians of Public Interest

This chapter presents the main elements of central banks’ traditional functions as gatekeepers of monetary and broader financial and economic stability and outlines some emerging considerations relating to central banks’ enhanced role as guardians of public interest. With regard to the central banks’ emerging enhanced role, the analysis focuses on their (1) heightened policy coordination need with fiscal, regulatory, and debt management authorities to increase the efficiency of the monetary policy transmission mechanism and the overall efficacy of economic policy making, (2) principal role in the establishment of a sovereign asset and liability management framework to identify, monitor, and manage sovereign balance sheet risks on a consolidated basis, which also helps monetary policy through a more accurate estimation of sovereign risks and consequently a more appropriate interest rate setting, (3) active role in the development of domestic capital markets to enhance the country’s funding sources and reduce its foreign exchange risk exposure, as well as to help the effectiveness of open market operations in targeting interest rates and in turn affecting the real economy, and (4) envisaged implicit role as protectors against emergent financial disruptions.