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Central Banks: Powerful, Political and Unaccountable?

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  • Buiter, Willem

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 market maker ‐ 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, 2014. "Central Banks: Powerful, Political and Unaccountable?," MPRA Paper 59477, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59477
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. repec:bla:ausecr:v:51:y:2018:i:3:p:309-335 is not listed on IDEAS
    3. 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.
    4. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    5. repec:sgm:jbfeuw:v:2:y:2015:i:4:p:14 is not listed on IDEAS
    6. 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.
    7. 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.
    8. 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.

    More about this item

    Keywords

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

    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
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • 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
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • 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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