Central banks around the globe are likely to get even broader mandates in the post-crisis era and will retain many of their often improvised unconventional tools, according to research published by the European Central Bank on Wednesday.
Banks will increase their focus on financial stability, use more macro-prudential tools, communicate more actively and may continue to cross the line into the realm of politics, said an ECB paper based on surveys of central bankers and academics.
Central banks resorted to untested policy instruments, like negative interest rates and large-scale asset buys, during and after the global financial crisis, hoping to revive growth and inflation.
Buying big chunks of government debt, and in the ECB’s case, taking part in sovereign bailouts, central banks have been heavily criticized for exceeding their mandates, playing politics and attempting to meet conflicting goals with improvised instruments.
“We see central banks in the future as having broader mandates, using macro-prudential tools more widely, and communicating more than before the crisis,” said the paper, which does not necessarily reflect the ECB’s opinion.
“We expect most (unconventional tools to) remain in central banks’ toolkits, in particular because central bank governors who gain experience with a particular tool are considerably more likely to assess that tool positively,” it added.
A key question that remains open is whether banks will continue to cross the line into politics with quasi-fiscal policies, like large-scale lending to banks and corporations, which essentially put the taxpayer at risk.
Communication, which has become a key policy instrument, may become an even more prominent tool, the paper also concluded, even if there are disagreements over how banks should use policy guidance.
Still, the costs and benefits of using unconventional tools require more studies and inflation targets should not change, the paper said.