Abstract
This chapter presents the main elements of central banks’ traditional functions as gatekeepers of monetary and broader financial and economic stability and outlines some emerging considerations relating to central banks’ enhanced role as guardians of public interest. With regard to the central banks’ emerging enhanced role, the analysis focuses on their (1) heightened policy coordination need with fiscal, regulatory, and debt management authorities to increase the efficiency of the monetary policy transmission mechanism and the overall efficacy of economic policy making, (2) principal role in the establishment of a sovereign asset and liability management framework to identify, monitor, and manage sovereign balance sheet risks on a consolidated basis, which also helps monetary policy through a more accurate estimation of sovereign risks and consequently a more appropriate interest rate setting, (3) active role in the development of domestic capital markets to enhance the country’s funding sources and reduce its foreign exchange risk exposure, as well as to help the effectiveness of open market operations in targeting interest rates and in turn affecting the real economy, and (4) envisaged implicit role as protectors against emergent financial disruptions.
*I thank Dr. Bjorheim for insightful comments and suggestions.
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Notes
- 1.
Central banks may track the overall inflation or core inflation measure, which excludes food and energy from personal consumption expenditures.
- 2.
See also Chap. 14.
- 3.
Most central bank official reserves consist of foreign currency assets, gold, and Special Drawing Rights (SDRs) and claims against the IMF.
- 4.
See also Chapters in Part II and III.
- 5.
See also Ingves (2018).
- 6.
If the non-bank private sector repays, at redemption, bonds held by the Federal Reserve using its bank deposits, then those deposits (and in turn, commercial bank reserves) fall and money balances are eliminated. Also, bank reserves may be reduced if the Federal Reserve sells bonds that it holds to Primary Dealers (PDs) the day before they mature and PDs pay the Federal Reserve with their reserves at the Federal Reserve. In this case, the Federal Reserve’s liabilities (commercial bank reserves) are reduced in tandem with its assets (sold bonds). In this process, central banks engaged in QE need to ensure that the pace of their QE exiting guarantees a steady growth in the supply of money that is consistent with both low inflation and wider macroeconomic stability.
- 7.
See also Chap. 10.
- 8.
A stylized sovereign balance sheet typically includes in the asset side (1) international reserves, (2) net fiscal assets (present value of primary fiscal balances), (3) value of money issuance (seigniorage, or zero for countries using another country’s currency as a legal tender), and (4) other assets, including net pension and wealth funds, state-owned enterprises, infrastructure, and real estate, less explicit and implicit contingent claims, including guarantees, and in the liability side (1) external debt, (2) domestic debt, and (3) base money (Das et al. 2012).
- 9.
- 10.
For a discussion of Mexico’s case, see Ortiz (2007).
- 11.
See also Chap. 8.
- 12.
See also Chap. 8.
- 13.
Some analysts argue against the store-of-value function of cryptocurrencies, e.g., Shin (2018).
- 14.
See also Chap. 26.
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Papaioannou, M.G. (2020). Central Banks: Gatekeepers of Monetary Stability and Guardians of Public Interest. In: Bjorheim, J. (eds) Asset Management at Central Banks and Monetary Authorities. Springer, Cham. https://doi.org/10.1007/978-3-030-43457-1_2
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