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Next Generation Central Banking

Michal Horváth

Chief Economist, the National Bank of Slovakia

Central Banking Beyond Inflation

Key Messages

Central banking has always been about more than inflation

  • The model of central banking has evolved to allow central banks to concentrate on what they are reasonably good at relative to other functions.
  • It does not mean price stability is all central banks deliver.
  • Price-stability-oriented monetary policy has been an important vehicle for social justice. It has contributed to financial stability too.
  • It has been the only game in town after all, and not only in the euro area. The world we live in would look a lot uglier had central banks not acted in a way they did.
  • Monetary policy became more and more intrusive into the functioning of markets in its attempts to ensure financing conditions are favourable in the economy.
  • If you are the only game in town with a clear task to deliver, you are in a trap, and it ultimately comes down to a cost-benefit analysis.

There is room within the existing framework to do more, but there are limits to what central banks can achieve if not accompanied by fiscal action.

  • One can argue that central bank’s contribution to the society should be more than a result of some divine coincidence between price stability and other goals.
  • Some people say we should do the same when it comes to financial stability concerns or even climate change goals.
  • The danger here is that the system becomes so complex nobody will understand what the central bank is actually trying to achieve.
  • In any case, the likely contribution of a more considerate monetary policy relative to other policies would be small. For financial stability, we have macroprudential policies. For climate change, we have taxation, regulation, markets organised by governments.
  • But central banks can contribute. As good citizens, they have to do what is consistent with their mandate to help tackling modern problems such as climate change

Mandate and independence question

  • It would be interesting to have a debate with the public about what they think the central bank mandate should be at the present juncture.
  • We would certainly painfully notice if price stability was missing. We should not conveniently ignore ugly examples of when price stability and central bank independence was sacrificed in the name of the will of the people.
  • If you sacrifice price-stability-oriented central banking in the name of some notion of social justice, you may well end up with neither.
  • There is nothing progressive about dismantling independent institutions and subjecting them to the will of the people.