Session 1: (Why) Are central banks necessary?

Alan S. Blinder, Princeton University

Jon Faust, Johns Hopkins University

Alan S. Blinder (Mr Blinder participated by video link) and Jon Faust set the framework for the conference by reviewing the fundamental tasks of a central bank (monetary policy, lender of last resort, supervision/oversight and regulation of banks and responsibility for the payment system) and giving a retrospective description of the historical development of monetary policy (the gold standard, the Bretton Woods system and the inflation target).

According to Alan S. Blinder, the central bank has a natural monopoly on monetary policy and on the role of lender of last resort. These tasks cannot be executed by any other actor. On the other hand, supervision and regulation, as well as responsibility for the payment system, can.

Following the most recent financial crisis, central banks have been given a broader responsibility for monetary policy. From merely being a question of stabilising the general price level, the task has come to include new tools (quantitative easing and forward guidance) and greater consideration of other parts of the economy (such as financial stability).

Jon Faust pointed out that it is important to now look at a longer historical span when formulating the central bank's mandate. Otherwise, there is a risk of focusing solely on the most recent crisis, and forgetting what happened earlier. As an example, he mentioned the transition from the gold standard to the introduction of an inflation target. This change meant that one went from putting financial stability and a fixed exchange rate at the top of the agenda, to prioritising the inflation target above all, while the exchange rate was allowed to float and financial stability faded into the background.

A recurring question when considering the central bank’s mandate now is what responsibility it should have for financial stability.

Finally, both speakers agreed that the central bank must be independent, as politicians tend to be too short-sighted and conduct policy that will win them the next election. During a financial crisis, the objectives of the politicians and the central bank converge. It is then necessary to have close consultation and collaboration between the central bank and the finance ministry.