Two Major Economic Crises in the Early Twenty-First Century and their Impact on Central Bank Independence

Two major economic crises in the early twenty-first century have had a serious impact on monetary policy and CB independence. Disruption in financial intermediation and associated deflationary pressures caused by the global financial crisis of 2007–2009 and European financial crisis of 2010–2015 pushed central banks (CBs) in major currency areas towards adoption of unconventional monetary policy measures, including large-scale purchase of government bonds (quantitative easing). The same approach has been taken by CBs in response to the COVID-19 crisis in 2020 even if the characteristics of this crisis differ from the previous one. As a result of both crises, CBs have become major holders of government bonds and de facto – main creditors of governments. Against rapidly deteriorating fiscal balances, CBs have become hostages of fiscal policies, which compromises their independence. Risks to the CB independence also come from their additional mandates (beyond price stability) and populist political pressures.

What Is the European Central Bank Supposed to Do? Recommending a Review of the ECB as anInstitution in Light of Two Decades of Crisis

In July 2021, the European Central Bank (ECB) published a new monetary policy strategy, the first time in 17 years that it had undertaken a review of its monetary policy. In the intervening time, the world - and the economic challenges facing the ECB - have changed immensely but partly as a result of the ECB's own maneuvering. In particular, monetary policy has been relied upon for every single malaise facing the global economy, including and up to the coronavirus pandemic. This paper argues that a review of central banks as an institutional mechanism in general, and in particular the ECB, was overdue but should not have been limited to policies;instead, an opportunity was missed to have an institutional review to examine whether or not it has been performing as intended. In particular, the vast experiment of unconventional monetary policy/issuance should have been more scrutinized from an institutional level as it appears to have contributed to the current problems the European economy faces. Europe and the ECB would be well served by taking stock of its actions over the past two decades and especially during the era of unconventional monetary policy to find a sustainable route forward.

What Is the European Central Bank Supposed to Do?

In July 2021, the European Central Bank (ECB) published a new monetary policy strategy, the first time in 17 years that it had undertaken a review of its monetary policy. In the intervening time, the world - and the economic challenges facing the ECB - have changed immensely but partly as a result of the ECB's own maneuvering. In particular, monetary policy has been relied upon for every single malaise facing the global economy, including and up to the coronavirus pandemic. This paper argues that a review of central banks as an institutional mechanism in general, and in particular the ECB, was overdue but should not have been limited to policies;instead, an opportunity was missed to have an institutional review to examine whether or not it has been performing as intended. In particular, the vast experiment of unconventional monetary policy/issuance should have been more scrutinized from an institutional level as it appears to have contributed to the current problems the European economy faces. Europe and the ECB would be well served by taking stock of its actions over the past two decades and especially during the era of unconventional monetary policy to find a sustainable route forward.

National central banks in EMU: time for revision?

The national central banks of the euro area are crucial to the monetary policy of the euro. Their Governors sit (on a personal title) on the Governing Council of the ECB, and they execute most of the monetary policies. Whereas the recent ruling by the German Constitutional Court on the Public Sector Purchases Program highlighted the uncomfortable role of the German Bundesbank in between national and EU law, the euro-crisis already showed other legal strains on the position of the national central banks in Economic and Monetary Union. This article argues that EMU empowered national central banks, even when it took away their power to individually set monetary policies for their respective Member States. The euro-crisis then disturbed the balance struck in the construction of the ECB between protecting national interests and effective decision-making, resulting in several legal problems.

Two Major Economic Crises in the Early Twenty-First Century and their Impact on Central Bank Independence

Two major economic crises in the early twenty-first century have had a serious impact on monetary policy and CB independence. Disruption in financial intermediation and associated deflationary pressures caused by the global financial crisis of 2007-2009 and European financial crisis of 2010-2015 pushed central banks (CBs) in major currency areas towards adoption of unconventional monetary policy measures, including large-scale purchase of government bonds (quantitative easing). The same approach has been taken by CBs in response to the COVID-19 crisis in 2020 even if the characteristics of this crisis differ from the previous one. As a result of both crises, CBs have become major holders of government bonds and de facto - main creditors of governments. Against rapidly deteriorating fiscal balances, CBs have become hostages of fiscal policies, which compromises their independence. Risks to the CB independence also come from their additional mandates (beyond price stability) and populist political pressures.

Economic policy responses to the COVID-19 pandemic: The role of central bank independence.

Is central bank independence (CBI) associated with economic policy responses to mitigate the adverse economic effects of the COVID 19 pandemic? In this paper, we provide cross-country evidence that it does. Our results generally indicate that more independent monetary policy authorities have adopted smaller cuts in the policy rate and reserve requirements. However, fiscal and macro-financial packages are relatively larger in countries with more independent central banks. These results are robust to different sets of control variables and different econometric specifications that include an instrumental variable estimation.

COVID-19, Seignorage, Quantitative Easing and the Fiscal-Monetary Nexus.

The huge fiscal expansions triggered by the corona crisis raised debt/GDP ratios to very high levels. This led some economists to reconsider the taboo on seignorage. Following a brief documentation of the crisis impact and aggregate demand policies responses the paper discusses views of academics and policymakers on seignorage. Optimal taxation considerations imply that the decision on allocating deficit financing between debt and seignorage falls within the realm of fiscal authorities-a fact that infringes on central bank (CB) autonomy. The paper explores ideas aimed at improving the tradeoff between those two principles. Implication of cross-country variations in the need to use seignorage is discussed. Comparison of the indirect contribution of quantitative easing (QE) to deficit financing with the direct contribution of seignorage implies that QE is a substitute to seignorage that preserves central bank dominance without much change in existing monetary institutions. Comparison of empirical evidence from the USA during the global financial crisis with the post-WWI German inflation supports the view that for countries experiencing deflationary pressure seignorage is more potent in moving inflation toward its target than QE. Given the current outlook temporary use of seignorage does not appear to involve a substantial risk of inflation.