Central Banks: Exiting the Crisis Mode

Innovative monetary policies have been triggered by the 2008-2010 crises. Withdrawing these unconventional policies brings in challenges but central banks should think about the new boundaries of their activities that go well beyond the narrow field of monetary policy.

This paper underlines the difficulty to reconcile three objectives: accompanying the economic recovery when it is feeble, normalising the liquidity situation in money markets, and setting incentives right to encourage the cleaning-up of bank assets. The articles argues in favour of longer-term open market operations as a new central tool for the implementation of monetary policy, while it underlines the limits of strategies based on negative interest rates or on forward guidance.

In the case of the euro area, the ECB will also face another host of longer term challenges. These include financial disintegration, the political economy of its OMT programme, the institutional dynamics of Banking Union, and its new “three-pronged” prerogatives (financial stability, supervision and monetary policy). Its mandate will likely need to be redefined.