The Changing Role of Central Banks in the Crisis

The crisis has exposed central banks all over the world to play a special – and partly new – role in advanced economies. This poses a series of challenges to the institutional framework underlying monetary and other policies. The first is the need to adapt the mandate, especially to ensure financial stability. The other is the impact of monetary policy on other policies, in particular fiscal, and on the overall institutional framework. The paper focuses on the European monetary union, which was mainly designed for good times. Since crises do occur, however, monetary policy needs to ensure that they do not end up into catastrophes. But monetary policy cannot be the only game in town and substitute for other policy actors. This is a difficult balancing act, which only an independent central bank can play. However, central bank independence is being put at risk throughout the world.