by Jaime Caruana
The rebalancing of policies and improvements to frameworks carry high stakes for central banks. The past few years have confirmed how indispensable the institution has become. Independence, within their mandates, allowed central banks to act with determination to cope with the financial crisis. This determination was critical at the time for putting the global economy on the path to recovery.
But the extraordinary burden placed on the institution since the crisis is generating growing strains. Markets and the public at large have increased their dependence on and expectations about what central banks can do. The wish list has become quite long: restore full employment; ensure sustained growth; preserve price stability; and deliver a foolproof financial system. This is a tall order, and central banks alone cannot deliver on it.
Indeed, the extraordinary measures taken to stimulate the global economy have sometimes tested the boundaries of the institution. The line between monetary and fiscal measures has become increasingly blurred.
Central banks function best if they focus on their area of competence and excellence: achieving monetary and financial stability. More realism and clarity about what central banks can and cannot achieve would help them focus on these areas. An institutional framework that clearly delineates their responsibilities from those of other policymakers is key. Monetary policy needs to work alongside prudential, fiscal and structural policies as part of the rebalancing we are calling for today. Central bank independence, backed by transparency and accountability, remains as crucial as ever.
The author, Jaime Caruana, is General Manager BIS (Bank for International Settlements).
