By Andreas Charalambous and Omiros Pissarides

Over the last 15 years, particularly after the financial crisis of 2008, the role of central banks (CBs) in developed economies has expanded and become even more important.

The policies of central banks today have strong implications for economic growth, equity markets and overall financial stability. Even issues with a strong socio-political dimension, such as public debt, economic inequality and climate change, are affected by CBs’ policies.

It is, therefore, natural that the ramifications of the expanded role of CBs fuel scientific and political debates. Some analysts believe that their independence and effectiveness is at risk due to, among other factors, their interventions in government bond markets and indirect support of vulnerable economies.

More broadly, the necessity of formulating a new balance between the required independence and accountability of CBs is undergoing a heated debate. In this context, various recommendations are presented by analysts, some of which were, until recently, considered taboo.

The economic historian Monet proposes the establishment of a scientific European Credit Council, with the major objective of critically evaluating the policies of the CBs, taking into consideration their expanded role. The council’s role would be exclusively consultative, and it would assist the European Parliament in exercising its control function in an effective manner, while, at the same time, contributing to the scientific dialogue.

Another recommendation concerns the institutionalisation of policy coordination of the CBs of developed economies, aimed at upgrading the process of informal exchange of views that takes place in international forums, such as the Jackson Hole Economic Symposium.

Other topics raised in the dialogue include:

  • Differentiation of the CBs’ primary target, notably to maintain inflation at 2 per cent, and its setting at higher levels, in order to offer CBs extended margins for reaction during periods of recession. Most analysts do not favour this suggestion
  • Expanding the mission of CBs, beyond the goal of maintaining low inflation, in the context of their differentiated role
  • Adoption of a simplified semi-automatic framework for interest rate policy formulation purposes, which will limit the discretion of CBs and improve the predictability and effectiveness of monetary policy
  • Reform of the communication policy, including so-called ‘forward guidance’, the effectiveness of which is, in its current form, questioned by a number of analysts

In general, CBs have responded to their upgraded role in a satisfactory manner, despite the fact that a number of analysts believe they were slow to react during the post-pandemic inflation spike.

There is also public criticism, primarily from commercial bank executives, that focuses on the fact that the supervisory framework of banks, after the financial crisis of 2008, has become excessively restrictive.

The radical changes which are currently being discussed for the banking sector inevitably require open dialogue and bold reforms. The necessary preservation of the independence of CBs from political interference should not form an obstacle.

Andreas Charalambous and Omiros Pissarides are economists