Central Banks: Powerful, Political and Unaccountable?

Willem Buiter

MPRA Paper from University Library of Munich, Germany

Abstract: Central banks’ economic and political importance has grown in advanced economies since the start of the Great Financial Crisis in 2007. An unwillingness or inability of governments to use countercyclical fiscal policy has made monetary policy the only stabilization tool in town. However, much of the enhanced significance of central banks is due to their lender ‐ of ‐ last ‐ resort and market ‐ maker ‐ of ‐ last ‐ resort roles, providing liquidity to financially distressed and illiquid financial institutions and sovereigns. Supervisory and regulatory functions – often deeply political, have been heaped on central banks. Central bankers also increasingly throw their weight around in the public discussion of and even the design and implementation of fiscal policy and structural reforms ‐ areas which are way beyond their mandates and competence. In this lecture I argue that the preservation of the central bank’s legitimacy requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must become more accountable by increasing the transparency of their lender ‐ of ‐ last ‐ resort and market maker ‐ of ‐ last resort activities. Central banks ought not to engage in quasi ‐ fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.

Keywords: seigniorage; quasi-fiscal; independence; legitimacy; accountability; monetary policy; regulation; supervision. (search for similar items in EconPapers)
JEL-codes: E02 E42 E5 E52 E58 E6 E62 E63 G18 G28 H63 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Working Paper: Central Banks: Powerful, Political and Unaccountable? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:59477

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