The Banking Executive Magazine, Issue 154, October 2021

Central Banks’ Additional Roles revolution. As I argued in a recent National Institute of Economic and Social Research monograph, radical whatever-it-takes monetary expan- sion has prevented three huge shocks (the 2008 global financial crisis, the near-collapse of the euro in 2012, and COVID-19) from triggering a global depression at a time when fis- cal policies in the United States and Europe were restrictive. The pro- longed pull of deflationary forces vindicated this policy choice. But all policy innovations create new dangers, and there is now a greater risk that the shift to government fiscal laxity will encroach on monetary- policy independence. Moreover, larger financial-risk exposures (espe- cially in bond markets) could make monetary tightening a more haz- ardous endeavor, with a heightened risk of policy error. Even more troublesome is that the success of balance-sheet policies has created unrealistic expectations about what central banks can achieve. The limitless scale and di- versity of balance-sheet instruments means that the public can expect, logically if not wisely, central banks to achieve many new objectives. For example, ambitious public infra- structure programs and plans for a more rapid transition to a green economy could be furthered by cen- tral-bank (or regulatory) support for private bond issuance. Affordable housing for the young could be championed in a similar way. You name it, and the central bank can be expected at least to listen. And politi- cians might well be ready to man- date central banks to take on new objectives. After all, the simple re- joinder that “central banks don’t do this” no longer works. Modern soci- eties are complex, and great expec- tations have been placed on public authorities. HOW TO PROTECT CENTRAL BANKS? To implement monetary policy effec- tively, they must retain the right to sell any asset they purchase – be it green bonds, infrastructure bonds, mortgage-backed securities, foreign securities, or anything else. But on top of that, we need an independent review of the costs and benefits of their transactions. The International Monetary Fund’s Independent Evalu- ation Office is a model that could be emulated for this purpose. the BANKING EXECUTIVE 10 ISSUE 154 OCTOBER 2021