Panel discussion: How should central banks be designed

Svein Gjedrem, Norwegian Ministry of Finance and the Norwegian School of Economics

Charles Goodhart, London School of Economics

Eric Leeper, Indiana University

Patricia Mosser, Columbia University

Some central issues that have arisen since the financial crisis in 2008 are how we should extricate ourselves from the low inflation situation and how we can maintain financial stability. A critical question that has often been raised is why central banks today have not succeeded in attaining their inflation targets, despite creating massive volumes of money.

One answer to this, according to the panel, could be that without the right fiscal policy back-up an expansionary monetary policy does not lead to higher inflation. Another important factor highlighted was the development of government debt. In Switzerland and Sweden, where government debt has declined over time, it has proved more difficult to bring up inflation. One of the conclusions drawn here was that if rules of action are drawn up for monetary policy, there should be corresponding rules for fiscal policy.

Another subject that was discussed was that it should be determined in advance who would decide what in a crisis. Which authority shall determine whether a bank is solvent? Who shall provide liquidity or credit? In the United States it became apparent during the financial crisis that it had not been clarified who had responsibility for this, so it became a problem for the US Federal Reserve, even though they did not have supervisory responsibility. Overlapping responsibility and gaps in the system regarding the lender of last resort also increase the risk of moral hazard and of regulatory arbitrage, that is, that regulatory frameworks are used to make profits. In this context, the importance of designing regulatory frameworks so that they reinforce the entire financial system, rather than being based on individual financial agents, was emphasised.

One piece of advice from the panel was that the central banks must retain responsibility and authority with regard to the payment system. It was observed that it is therefore important for the central banks to closely follow technological advances within the payments fields. The innovations that are under way, for instance, through very rapid transfers, could very well be some of the greatest challenges facing central banks in the coming period.