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Claudio Borio and Anna Zabai

We explore the effectiveness and balance of benefits and costs of so-called ‘unconventional’ monetary policy measures extensively implemented in the wake of the financial crisis: balance sheet policies (or ‘quantitative easing’), forward guidance and negative policy rates. We reach three main conclusions: there is ample evidence that, to varying degrees, these measures have succeeded in influencing financial conditions even though their ultimate impact on output and inflation is harder to pin down; the cost-benefit balance is likely to deteriorate over time; and the measures are generally best regarded as exceptional, for use in very specific circumstances. Whether this will turn out to be the case, however, is doubtful at best and depends on more fundamental features of monetary policy frameworks. We also provide a critique of prevailing analyses of ‘helicopter money’ and explore in more depth the role of negative nominal interest rates in our fundamentally monetary economies, highlighting some risks.

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Christine Kaufmann and Rolf H Weber

Prior to the Great Financial Crisis (2008/9) Central Banks used a single instrument, control over the short term interest rate, to achieve a single inflation target. The experience of the GFC has led Central Banks to give much more emphasis to financial stability, reverting to an earlier historical tradition. To hit two objectives efficiently, two instruments are required. A second set of instruments, macro-prudential measures, has been developed for this purpose. Macro-pru measures differ from micro-pru, since the former should vary according to the state of the banking (or wider financial) sector as a whole and be applied across the board, whereas the latter relates to the individual institution. There is, however, a large overlap between macro-pru and monetary policy on one side, and macro-pru and micro-pru on the other. Given such overlaps there is a strong efficiency argument for combining the conduct of all three within the Central Bank, but this not only greatly extends the powers, but also blurs the mandate, of an unelected technocratic agency, which is problematical. Much may depend on how successful Central Banks become in employing macro-pru measures, such as counter-cyclical capital requirements and varying limits on housing finance, since experience with these remains quite limited.

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Zhongfei Zhou

The People’s Bank of China (hereinafter PBOC) is facing several challenges in a new wave of financial reforms in China. The PBOC’s independence is always criticized. Taking into account the Chinese political system, however, central bank independence is less significant in China than in western countries. By contrast, legal provisions relating to the PBOC’s accountability to the National People’s Congress, the State Council and the Judiciary need to be improved. To fulfil its financial stability mandate, the PBOC should be provided with law-based financial stability instruments. The importance of a central bank in financial regulatory system has increasingly been recognized across countries after the global financial crisis. It is recommended that China’s Coordination Meeting System be legally upgraded to become a financial stability oversight committee, established within the PBOC, which brings together the expertise of central and local financial regulatory agencies and even independent experts in relevant fields. With respect to China’s deposit insurance scheme, priority should be given to preventing runs, and the moral hazard consideration should be secondary to preventing runs in the trade-off between preventing runs and limiting moral hazard.

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Charles Goodhart

In the aftermath of the financial crisis financial stability considerations have become more prominent in central banks’ policies and require substantial discretion in their implementation. We argue that transparency can serve as an instrument for central banks to balance the conflicting interests of different stakeholders and manage market participants’ expectations, explain their strategy and report on its implementation progress and receive comments and feedback by stakeholders. In view of the increasingly contested concept of central banks’ independence, we show that increasing and institutionalizing ex ante and ex post transparency on policy decisions and their implementation strengthen central banks’ accountability as a key ingredient and prerequisite for their independence. Finally, we hold that central banks’ new responsibilities for financial stability call for the development of a more comprehensive and inclusive approach given their strong impact on private actors and their linkages with other policy fields and governmental agencies.

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Raj Bhala

In the post-British Raj Era, financial liberalization is a hallmark of Indian banking regulation. The RBI is a focal point for change. The pace of change, however, is measured thanks to the legacy of Nehruvian Socialist-style controls, and to the complexity of Indian bank structure. Both payments and FX regulation exemplify this cautious approach to legal and policy reform. Underlying financial liberalization are long-held suspicions in India about freewheeling western-style banking markets. The RBI seeks to develop a modern banking system while ensuring the poor and emerging middle class are not financially excluded from that system. That means the cautionary approach to reform that has characterized the RBI will endure.

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Harold James

The chapter examines the changing experiences of German central banking with respect to political independence, and to issues such as lender of last resort actions with regard to the domestic banking system as well as to price stability. It also examines the role of foreign central bank models—of the 1844 British Bank Act on the creation of the first German central bank, or British and American central banking on the refounding of the Reichsbank after the interwar hyperinflation, and the Allied influence on the creation of the Bank Deutscher Länder (the predecessor of the Bundesbank). In addition, there is a discussion of how German central banking history and experiences influenced European thinking and helped to shape European Monetary Union.

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Chiara Zilioli and Antonio Luca Riso

This chapter focuses on the scope of the principle of central bank independence in the legal framework of the European Union, which has established such principle at constitutional level for both the European Central Bank (ECB) and the national central banks (NCBs) to ensure the highest level of legitimacy. On the depth of central bank independence, the chapter offers a review of the debate between those who are concerned that monetary policy decisions have been taken out of democratic control, and those arguing that only a central bank that is independent from political power can maintain a stable currency for the benefit of the citizens and that the ECB’s accountability has been ensured through several legal requirements and practices . With regard to the scope of central bank independence, this chapter analyses the question whether this principle extends to additional tasks which have been conferred, in particular after the crisis, upon the NCBs and the ECB, including in particular micro-prudential supervision, and whether the conferral of these new tasks could jeopardize central bank independence.

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Christopher Adam, Andrew Berg, Rafael Portillo and Filiz Unsal

The monetary landscape in sub-Saharan Africa has changed profoundly during the last three decades, from money financing of fiscal deficits in the 1980s to stabilization in the context of broad reform programs and de jure money-targeting regimes in the 1990s and, more recently, efforts to modernize policy frameworks. This chapter provides an overview of the issues facing central banks as they modernize. It places these efforts in their historical context, reviews the reasons for dissatisfaction with current regimes, and discusses the challenges facing central banks in SSA. These include the nature of the monetary transmission mechanism, the prevalence of supply shocks, the volatility of fiscal policy, and the management of aid and natural resource revenues. It discusses the role of the exchange rate and discusses appropriate modeling frameworks, as well as the role of central banks in the pursuit of financial stability and in the management of natural resource wealth.

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Paul Tucker

In the aftermath of the financial crisis financial stability considerations have become more prominent in central banks’ policies and require substantial discretion in their implementation. We argue that transparency can serve as an instrument for central banks to balance the conflicting interests of different stakeholders and manage market participants’ expectations, explain their strategy and report on its implementation progress and receive comments and feedback by stakeholders. In view of the increasingly contested concept of central banks’ independence, we show that increasing and institutionalizing ex ante and ex post transparency on policy decisions and their implementation strengthen central banks’ accountability as a key ingredient and prerequisite for their independence. Finally, we hold that central banks’ new responsibilities for financial stability call for the development of a more comprehensive and inclusive approach given their strong impact on private actors and their linkages with other policy fields and governmental agencies.

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Robert B Kahn and Ellen E Meade

This chapter discusses the evolution of central bank interactions since the early 1970s. Today, central banks have more forums in which they interact without finance ministries than they did in earlier times; interactions have shifted away from managing exchange rates and toward monitoring and regulating the international financial system, global financial institutions, and cross-border capital flows. At the same time, the rise in statutory independence has given central banks more authority to shape the response to events, and the rise of new powers and their integration in markets has resulted in the broadening out of the prominent coordinative groupings to include countries outside the historically traditional major powers. Our main conclusion is that the relationship-building that is inherent in multilateral interaction has provided a springboard for coordination in times of stress or crisis. Crises matter—they can be turning points in terms of the actions taken and the countries included in the dialogue.