Central Banks Adapt to New Challenges

The Covid-19 pandemic has put the spotlight on the key role of central banks in crisis management. Central banks have again demonstrated their ability to deal with systemic events by adapting their response. Central banks in advanced and emerging economies implemented an unprecedented set of measures, going far beyond those adopted during the financial crisis. These measures were aimed not only at stabilizing financial markets, but also at channeling credit directly to businesses and households. The difficulties and challenges are many and range from the emergence of new financial markets to better coordination of fiscal and monetary policies.

There is a consensus that self-insurance through the accumulation of foreign exchange reserves is not optimal. Similarly, there is little that countries can do to limit risk through protective measures in managing capital flows without forgoing the benefits of participation in the global financial system. In the absence of a comprehensive and well-funded global safety net, liquidity safeguards under the aegis of the central bank issuing the international currency will remain the primary protection (Carstens, 2021b).

The best way to reduce the tension between fiscal and monetary policies is to increase sustainable growth. Achieving higher growth requires structural reforms, supported by growth-friendly fiscal policies. The independence of central banks is essential so that they can continue to focus on their core mandate of maintaining price and financial stability.