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Central Banks: Powerful, Political and Unaccountable?

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  • Buiter, Willem H.

Abstract

Central banks’ economic and political importance has grown in advanced economies since the start of the Great Financial Crisis in 2007. An unwillingness or inability of governments to use countercyclical fiscal policy has made monetary policy the only stabilization tool in town. However, much of the enhanced significance of central banks is due to their lender-of-last-resort and market-maker-of-last-resort roles, providing liquidity to financially distressed and illiquid financial institutions and sovereigns. Supervisory and regulatory functions – often deeply political, have been heaped on central banks. Central bankers also increasingly throw their weight around in the public discussion of and even the design and implementation of fiscal policy and structural reforms - areas which are way beyond their mandates and competence. In this lecture I argue that the preservation of the central bank’s legitimacy requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must become more accountable by increasing the transparency of their lender-of-last-resort and marketmaker-of-last resort activities. Central banks ought not to engage in quasi-fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.

Suggested Citation

  • Buiter, Willem H., 2014. "Central Banks: Powerful, Political and Unaccountable?," CEPR Discussion Papers 10223, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10223
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    Cited by:

    1. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    2. van Riet, Ad, 2017. "Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank?," MPRA Paper 83451, University Library of Munich, Germany.
    3. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Alan Blinder & Michael Ehrmann & Jakob de Haan & David-Jan Jansen, 2017. "Necessity as the mother of invention: monetary policy after the crisis," Economic Policy, CEPR;CES;MSH, vol. 32(92), pages 707-755.
    5. Dikau, Simon & Volz, Ulrich, 2021. "Central bank mandates, sustainability objectives and the promotion of green finance," Ecological Economics, Elsevier, vol. 184(C).
    6. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Armando Marozzi, 2021. "The ECB and the Cost of Independence. Unearthing a New Doom-Loop in the European Monetary Union," BAFFI CAREFIN Working Papers 21152, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. Andrew G Haldane, 2018. "How Monetary Policy Affects Your Gross Domestic Product," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(3), pages 309-335, September.
    9. Christophe Blot & Paul Hubert & Fabien Labondance, 2018. "Reforming the European Central Bank," Sciences Po publications info:hdl:2441/70np5j7s548, Sciences Po.
    10. Thomas I. Palley, 2019. "Central Bank Independence," FMM Working Paper 49-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    11. Dikau, Simon & Volz, Ulrich, 2021. "Central bank mandates, sustainability objectives and the promotion of green finance," LSE Research Online Documents on Economics 109302, London School of Economics and Political Science, LSE Library.
    12. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    13. repec:sgm:jbfeuw:v:2:y:2015:i:4:p:14 is not listed on IDEAS
    14. Donato Masciandaro & Davide Romelli, 2018. "Beyond the Central Bank Independence Veil: New Evidence," BAFFI CAREFIN Working Papers 1871, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    15. Ricardo Reis, 2015. "Different Types of Central Bank Insolvency and the Central Role of Seignorage," NBER Working Papers 21226, National Bureau of Economic Research, Inc.
    16. William A. Allen, 2015. "Asset choice in British central banking history, the myth of the safe asset, and bank regulation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 18-31, June.

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    More about this item

    Keywords

    accountability; independence; legitimacy; monetary policy; quasi-fiscal; regulation; seigniorage; supervision;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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