Edited by Louis-Philippe Rochon and Sergio Rossi
Central banking (that is, the variety of policy targets, strategies and instruments used by monetary authorities all around the world) has become an important topic of discussion in many circles beyond the economics profession, most notably at the political level and in society at large. Owing to the global financial crisis induced by the demise of Lehman Brothers on 15 September 2008, all major central banks in the world have been led to intervene in order to avert the collapse of the global economy, mainly as a result of the meltdown of their “globalized” financial systems. Since then, monetary policy has been in the foreground (to try) to address a number of issues raised by such a systemic crisis at a global level. Both supporters and opponents of monetary-policy interventions are being forced to learn, from empirical evidence more than from conventional economic wisdom, that several firmly held beliefs in monetary macroeconomics are essentially wrong or flawed. This is so much so that even the nature of money itself is fundamentally different from its simplistic understanding – within the central banks’ community as well as beyond it (see McLeay et al., 2014).
As a matter of fact, the global financial crisis has forced many, particularly within the mainstream of the profession, to rethink afresh how central banks operate and also the nature of money and banking. Indeed, the established view about money’s exogeneity – epitomized by Friedman’s (1969, pp. 4–5) conception of “helicopter money” – as well as the causal link between bank deposits and bank loans, have been proven wrong by an increasing volume of empirical evidence across the global economy. To be truthful, several heterodox economists have been pointing out (since the 1980s, if not earlier) that in our economic systems money is an endogenous magnitude, whose issuance depends on banks’ credit lines independently of any pre-existent deposits with them. In this regard, central banks are settlement institutions on the interbank market, where they set the so-called policy rate(s) of interest in order to hit their monetary-policy goals eventually. That being the case, then any central-bank intervention that does not consider this empirical evidence can only by chance (rather than by design) affect the relevant economic system as intended by policy makers and the scientific community inspiring them. For instance, so-called “quantitative easing” programmes put into practice on both sides of the Atlantic cannot be successful, as they are inspired by the erroneous belief that money is exogenous and the central bank can induce banks to provide more credit lines to both households and non-financial firms just by increasing the volume of banks’ “liquidity” in the central bank vaults.
This Encyclopedia aims at providing a critical understanding of central banking, based on a plural perspective on several issues at both theoretical and policy-oriented levels. It intends to explain the complexity of monetary-policy interventions, their conceptual as well as institutional frameworks, and their own limits and drawbacks. It is informative, as it provides the reader with the body of knowledge that is necessary to understand the background of central banks’ decisions in the aftermath of the global financial crisis. It is stimulating, because it offers different and at times controversial explanations of the same subject matter, illuminating it also from a historical point of view. The history of p. xxixmonetary thinking, indeed, is seminal for understanding both current monetary thought and contemporary monetary-policy decisions – both when they are right and when they are wrong, to paraphrase Keynes’s (1936, p. 383) argument with respect to economists’ ideas.
The more than 150 contributors to this collective effort have been confronted with the challenge of writing nearly 250 entries in a clear and comprehensive way, considering the space constraint imposed by such a voluminous, but synthetic work. They are all warmly thanked for having accepted this challenge, whose outcomes should contribute to a much better, and sound, understanding of an essential item (money) and an important institution (the central bank) for the “common good”. The editors of this volume wish also to thank the publishers, whose professional involvement made it possible for this Encyclopedia to see the light in a timely manner for central banking with regard to the still open issues raised by the global financial crisis as well as by its dramatic and still largely unsettled consequences for a variety of stakeholders across the world.
Louis-Philippe Rochon, Laurentian University, CanadaSergio Rossi, University of Fribourg, Switzerland