Will the Fed and ECB Learn From the Crises and Adapt in the Future?
This is an essential question at a time when there is no shortage of challenges for the future, such as the energy transition.
Faced with unprecedented crises, central banks have revolutionized their intervention methods in recent years. Will the return of inflation close this parenthesis?
The history of monetary policy is one of learning through crises. The Bundesbank became monetarist for one practical reason, the fall of the dollar standard. The Bank of England converted to inflation targeting after the pound left the European Monetary System (EMS). The role of central banks as lenders of last resort was rehabilitated by the great financial crisis, which put financial stability and macroprudential instruments at the top of their agenda.
These innovations were inspired by theoretical debates, some of which were long-standing, confirming Keynes' statement that “pragmatic men who believe themselves to be free from all intellectual influence are generally the slaves of some dead economist”.
They were also part of long-term developments. Powerful structural forces (slowing productivity, lack of risk-free assets, aging) pushed interest rates toward zero and forced central banks to seek alternatives such as asset purchases and steering expectations. Some economists deplore the fact that central banks have crossed the point of no return at the fiscal level and are interfering in eminently political allocation and redistribution choices.
Others consider this complementarity inevitable and wish to mobilize it in the face of tomorrow's challenges, such as the financing of the energy transition.
Is the extension of the scope of intervention of central banks compatible with their independent status?
What is certain is that tomorrow's central bankers will not have an easier task than those of today. Climate risk is now high on the prudential agenda of central banks, which are also looking at the risk of green inflation linked to the change in the energy mix. The digitization of the economy, the cryptocurrency trend, and decentralized finance raise existential questions by challenging the role of central banks at the heart of payment systems and the very sovereignty of money.
The answers that are emerging, such as central bank digital currency, raise complex questions for bank balance sheets and privacy protection. Finally, the rise of non-bank players is taking central banks out of their comfort zone and may create new risks if investment funds or market infrastructures take advantage of an implicit guarantee from the monetary authority.
Once the paragons of conservatism, central banks have been able to navigate the very turbulent waters of the last twenty years. This bodes well for their ability to meet the challenges ahead. Is the expansion of their scope of intervention compatible with their independent and apolitical status?
For some, the narrow mandate of central banks is an asset to be treasured. For others, the social responsibility of central banks limited to the preservation of the value of money has always been a myth, since their action inevitably produces secondary effects in areas beyond their mandate.
This raises the question of the capacity of institutions such as the European Parliament to control them effectively. The enlargement of the scope of intervention of central banks will only be legitimate if it is subject to an open and democratic debate.
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