Exploring the Challenges Surrounding Central Banking Today

Watercolor filtered American twenty dollar bill, on which 3D rendered COVID- 19 virus has been applied.

Louis-Philippe Rochon takes a look at central bank challenges since the financial crisis of 2007 and again during the current Coronavirus pandemic today.

Since the financial crisis of 2007, and again during the current COVID-19 health crisis, there has been a collapse of what we call the ‘monetary consensus’, which was based on the notion that countercyclical monetary policy alone could help in regulating economic activity, and achieve an inflation target. But since these crises central bankers and policy makers have come to realize what heterodox economists have been saying for well over eight decades: monetary policy alone cannot stimulate our economies. As such, there were calls for fiscal interventions, and fiscal policy responded in unprecedented ways.

This in itself was a rejection of more mainstream models, which only paid lip service to fiscal policy, usually attributing to it inflationary implications or crowding -out effects.

But monetary policy forged on. In the United States, Canada and elsewhere, central banks lowered interest rates close to the lower bound, in both recent crises. When conventional policies failed to stimulate economic activity with interest rates at near zero, many central banks embarked on an ‘unconventional adventure’ by adopting, first, quantitative easing, and then, pushing certain interest rates to below zero. This was an attempt to keep monetary policy relevant, despite indications that both more recent policies had little impact on economic activity.

Indeed, the aim of these policies was to revive economic activity, which was caught in the doldrums of ‘secular stagnation’: a deep crisis of aggregate demand. Yet, they have failed to deliver. Traditional heterodox explanations lie with the notion that at low rates, monetary policy is like ‘pushing on a string’. While this is undoubtedly true, we believe that there may exist deeper, structural issues as well, in addition to problems related to secular stagnation, that may be due to the financialization of our economies.

But one consequence of these crises was to show the limitations of traditional monetary policy, that is the use of interest rates to fine-tune our economies. And pertinent questions regarding different aspects of central banking, are being asked. More generally, central banks have been increasingly asked to broaden their mandate: a recent, and growing, literature has emphasized that they should be given new tasks and objectives rather than mere price stability. Likewise, the financial crises resulted in calls for central banks to redefine their missions in a way that better reflects the economic and social consequences of their actions in an increasingly economic complex, and also in the context of democracy.

The purpose of this series is to explore a number of challenges surrounding central banking today. These books would go beyond the immediate concern with monetary policy, and focus instead on the concept of central banking, more generally, on the social responsibility of policy, its implications for the environment, for women, and for income distribution, to name but a few.

In parallel with these books, we will be hosting over the next year a number of Webinars with some of the contributors to these books. The first book, on ‘The Future of Central Banking’, is meant to be an introductory book to the series, covering many themes that later books will explore in greater details. The first webinar is schedule for May 18th, 2020.

Webinar - poster (1)

 

 

 

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