Central banking at a crossroads
‘Central Banking at a Crossroads – Europe and Beyond’ has been selected Book of the Month for December by Anthem Press.
“This rigorous and novel investigation is a ‘must-read’ for all who either approve or disapprove of the unconventional instruments and practices used by central banks that have extended the mandate and blurred the traditional line between monetary and fiscal policy.” —Brigitte Young, University of Münster, Germany
“The book’s thought-provoking and sometimes controversial views are very welcome to the discussion even if one would not necessarily agree with all of them.” —Erkki Liikanen, Governor of the Bank of Finland
To mark the selection, Anthem Press features an interview with one of the book’s authors, senior researcher Jakob Vestergaard:
Q: An alternative title to your book would have been, ‘Re-thinking Central Banking: Post-Crisis Successes and Remaining Challenges’. Could you explain to what extent we have to “rethink” the system of central banking?
Jakob Vestergaard: Three things are clear. First, unconventional monetary policy was necessary to handle the financial crisis of 2008 when widespread financial disruptions had rendered the key policy tool in conventional central banking, the short term policy rate, largely ineffective. Second, five years down the road it is difficult to discern whether any real healing has taken place: is the banking system more robust and resilient today, and has the global economy bounced back from the shock of the 2008 crisis? In many countries, banks are still not lending at a scale required to contribute to a pick-up in economic activity, and there is little to suggest that bank resilience to adverse macroeconomic shocks has significantly increased. This leads to the third point: with quantitative easing close to what many see as its limits in terms of positive effects on the economy, it does not seem obvious what central banks in core countries can do to escape the trap of disinflation and stagnation (such as is the current trend in the Euro zone and in Japan), nor how central banks in the periphery are to tackle a potential sudden reversal in capital flows. In my view, the practice of central banking needs a substantial rethink, to the extent of tearing down the walls – previously zealously guarded and policed – between fiscal, monetary and other macroeconomic policies. These policies must be developed and formulated in a much more integrated and coherent way, as opposed to well-intended, ex-post ‘coordination’. The era of ‘compartmentalized’ macroeconomic policymaking is over, or it will be soon.
Q: Can you highlight the key innovations that central banks have introduced since the financial crisis of 2008?
Jakob Vestergaard:Central banks replaced conventional tools with new instruments and practices beyond their mandates, thus blurring the traditional separation from private financial markets and from governments. For the past five years, central banks have intervened in both public and private debt markets, taking on functions of market makers or dealers of last resort. Some – as Bank of England – plan to formalize these interventions into their day-to-day toolkit...