Limiting the Fiscalisation of Central Banks

Stephen G. CECCHETTI * Titulaire de la chaire de la famille Rosen en finance internationale, Brandeis International Business School ; chercheur associé, NBER ; chargé de recherche, CEPR ; vice-président, Comité scientifique consultatif, Conseil européen du risque systémique. Contact : cecchett@brandeis.edu.

Kermit L. SCHOENHOLTZ ** Professeur associé émérite, Leonard N. Stern School of Business, Université de New York ; membre du Comité consultatif de recherche financière, Office of Financial Research du Trésor des États-Unis.Les auteurs tiennent un blog sur www.moneyandbanking.com.Cet article est basé en partie sur Cecchetti et Schoenholtz (2021a). Les auteurs remercient Paul Tucker de les avoir aidés à améliorer leur compréhension du rôle et de la structure des banques centrales.

Since 2007, and especially during the Covid pandemic, central banks have expanded both the scope and scale of their interventions in unprecedented fashion, blurring the lines between monetary and fiscal policy. This fiscalisation endangers central bank independence, thereby weakening monetary policymakers' ability to deliver on their mandates for price and financial stability. To find a way back to the pre-2008 division of responsibilities, governments must establish clearer limits on what central banks can and cannot do. To limit fiscalisation, authorities can do two things: commit to structural distinctions between fiscal and monetary policy, and articulate a balance sheet reaction function (analogous to a policy interest rate reaction function) that includes the reversal of crisis interventions when market functionality is restored. Having engaged in fiscalisation more than once, either by choice or by circumstance, central banks need to establish a framework that prevents repetition.