Is the modern central bank in need of reform?
WHAT should central banks be doing these days? The recent financial crisis and recession placed central bankers in a central role in economic management, leading to interventions unprecedented in recent memory. The prominence of central banks in policymaking is easy to explain. Major interventions were necessary because of the scale of the crisis—a once-in-a-lifetime meltdown. And central banks were given an abnormally large role in these interventions because they, as semi-independent technocratic institutions, were more responsive than political institutions.But having played an instrumental role is keeping the global economy afloat, central banks are now coming under intense scrutiny. Critics are uncomfortable with monetary policy decisions, with bank bail-outs, and with pre-crisis central bank behaviour. Some have challenged central bank independence; others, the idea of discretionary monetary policy.In a Briefing this week, The Economist looks at the new world in which central bankers find themselves and the ways in which they may need to change in the future. To add to the discussion, we've asked the economists at Economics by invitation to answer the question: Is the modern central bank in need of reform?Not surprisingly, most of the respondents believe that some reform is needed. But there is no consensus on what, exactly, that reform should entail. John Makin and Michael Bordo recommend that central banks return to a focus on their primary goal—maintaining price stability—while Eswar Prasad warns that central bankers have been asked to do too much. But a number of other contributors argue that the big failure of pre-crisis policy was a neglect of the macroeconomic importance of financial stability. This role should get priority, says Hyun Shin. Central banks should use more of the available tools to maintain financial stability, writes Markus Brunnermeier. And central banks must coordinate closely with fiscal and regulatory authorities, argues Takatoshi Ito.Do read all the contributions. These questions are unlikely to go away. Indeed, they'll only become more difficult to answer as sovereign debt crises stress the ECB while rising commodity prices lead to cries that central banks are neglecting their price stabilisation goals. These complaints are the inevitable byproduct of a system in which the central bank is both powerful and (at least nominally) independent. It's not clear that both of those descriptors can be made to stick over the long haul.