Building the foundations for a new central bank doctrine: Redefining central banks’ missions in the 21st century

Abstract

The 2007-2008 financial crisis demonstrated both the responsibilities that central bankers, alongside other actors, bear for turbulences of this kind as well as how economics can be used to provide central bankers and governments with the understanding and tools that they need to prevent the international financial system from collapsing. At the same time, central banks’ responses to the crisis have taken monetary policy into unknown territory. The paper’s first section diagnoses good and bad practice in post-crisis central banking; assesses the efficiency of pre-crisis doctrines; and identifies the dangers of actions exceeding certain limits. It specifically focuses on the European Central Bank’s much-debated intervention in certain peripheral bond markets, particularly Greece. The second section is more normative and lays the foundations for a social science perspective of how to manage modern central banks, an approach that draws on a variety of disciplines including economics, governance theory and management. This starts with a definition of the new doctrine and its underlying philosophy, followed by an identification of sound central banking practices (revolving around a few key concepts, notably inflation and financial stability). The missions and objectives of these practices are then defined (along with a choice of indicators), culminating in an exploration of which strategies and tools might be used in both normal and turbulent times. Lastly, a few concrete rules of governance are offered, built on the triptych of central banks’ independence, accountability and composition, with specific focus placed on the process for selecting governors fit to handle the new role that modern central banks are destined to assume in developed countries