美联储-危机后的中央银行（英）-2024.5

FinanceandEconomicsDiscussionSeries

FederalReserveBoard,Washington,D.C.

ISSN1936-2854(Print)

ISSN2767-3898(Online)

CentralBankingPostCrises

MichaelT.KileyandFredericS.Mishkin

2024-035

Pleasecitethispaperas:

Kiley,MichaelT.,andFredericS.Mishkin(2024).“CentralBankingPostCrises,”FinanceandEconomicsDiscussionSeries2024-035.Washington:BoardofGovernorsoftheFederalReserveSystem,

/10.17016/FEDS.2024.035

.

NOTE:StafworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.

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CentralBankingPostCrises

by

MichaelT.Kiley

BoardofGovernorsoftheFederalReserveSystem

and

FredericS.Mishkin

GraduateSchoolofBusiness,ColumbiaUniversity

and

NationalBureauofEconomicResearch

Abstract

Theworldeconomyhasexperiencedthelargestfinancialcrisisingenerations,aglobal

pandemic,andaresurgenceininflationduringthefirstquarterofthe21stcentury,yieldingimportantinsightsforcentralbanking.Pricestabilityhasimportantbenefitsandisthe

responsibilityofacentralbank.Achievingpricestabilityinacomplexanduncertain

environmentinvolvesacrediblecommitmenttoanominalanchorwithastrongresponseto

inflationandpre-emptiveleaningagainstanoverheatingeconomy.Associatedchallengesimplythatcentralbankcommunicationandtransparencyarekeyelementsofmonetarypolicy

strategiesandtactics.Criseshaveemphasizedtheroleofcentralbanksinpromotingfinancial

stability,asfinancialstabilityiskeytoachievingpriceandeconomicstability,butthisrole

increasesriskstoindependence.Goalsforcentralbanksotherthanpriceandeconomicstability,

complementedbyfinancialstability,canmakeitmoredifficultforthemtostabilizebothinflationandeconomicactivity.

Keywords

centralbankgovernance,centralbanking,financialstability,monetarypolicy,scienceofcentralbanking

PreparedforTheOxfordHandbookofBanking,FourthEdition.Theauthorswouldliketo

thankJaneKrohnforherresearchassistance.TheviewsexpressedhereareourownandarenotnecessarilythoseoftheBoardofGovernorsoftheFederalReserveSystem,ColumbiaUniversity,ortheNationalBureauofEconomicResearch.DisclosureofMishkin’soutsidecompensatedactivitiescanbefoundonhiswebsiteat

/faculty/fmishkin/

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23.1Introduction

Centralbanksareexperiencingtheapocryphalcursethattheyarelivingthroughinterestingtimes.

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Inthelasttwentyyears,theyhavefacedtheglobalfinancialcrisisof2007-2009,theCovidpandemicof2020,andasurgeininflationin2022-2023.Thischapterexaminesthe

challengesthatcentralbanksfaceinthewakeofthesecrises.Wefocusonhowgovernance,monetarypolicyandfinancialstabilitypolicyatcentralbankshasevolvedinrecentyears.

Acentralbankisaunitofgovernmentthatcontrolsmonetarypolicy.Thepolicygoalsofcentralbanksfocusonpricestability,stabilityineconomicactivity,andfinancialstability—goalsthat

haveevolvedovercenturiesofpractice(Bordo,2007).Topromotethesegoals,acentralbankcontrolsthequantityand/orpricingofthegovernment’smonetaryliabilities,currencyand

reserves,andthetermsoflender-of-last-resortfacilities.

Becausethepreeminentroleofcentralbanksisthestabilizationofpricesandeconomicactivitythroughthesettingofmonetarypolicy,westartbydiscussingthecoreeconomicsofcentral

banking,andthendiscusshowthisanalysisimpactsthetoolsanddesignofmonetarypolicy.Thebroadeffectsofcentralbank’sactionsonmacroeconomicandfinancialconditionsareprimary

channelsthroughwhichacentralbank’sactivitiesimpactthebankingsystem.

Theroleofcentralbanksinpromotingfinancialstabilitystemsfromaleasttwofactors.First,

financialstabilitypromotespriceandeconomicstability.Second,thetoolsofmonetarypolicy

includelender-of-last-resortactivitiesthatstemfromcentralbankscontrolofthegovernment’smonetaryliabilities.Thesetoolscanbeusedtocombatfinancialinstabilityandcontributetoa

roleforcentralbanksinsupervisingthebankingsector.Wereviewtheseissuesinourdiscussion

1Thecurse,“Mayyouliveininterestingtimes”hasoftenbeenattributedtoancientChina,butsourceforsuch

attributionisnotclear.AmongtheearlypublishedusesofthisphraseisamemoirofSirHugheKnatchbull-

Hugessen,whoservedastheBritishambassadortoChinainthemid-1930s(Knatchbull-Hugessen,Hughe(1949).DiplomatinPeaceandWar.JohnMurray).

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ofcentralbankmandates.Ourdiscussionalsotouchesonpotentialadditionalmandatesforcentralbanksthathavebeendiscussedrecently.

Toillustratethemacroeconomicandfinancialchallengesfacedbycentralbanksastheypursuetheirmandates,wediscusschallengescreatedbylowinterestratesfollowingtheglobalfinancialcrisisandtheCovidpandemicandbytheinflationsurgein2021-22.Finally,weconcludewithasummaryofthelessonswehavelearnedforcentralbankstrategiesandtactics,includingissuesforfurtherresearch.

23.2TheCoreEconomicsofCentralBanking

Overthelastsixdecades,economistshavederivedfromtheoryandempiricalevidenceacoreof

economicanalysisthatguidescentralbank’sinsettingmonetarypolicy.Wediscussthis

economicanalysis,whichisoftenreferredtoasthe“scienceofcentralbanking”(Clarida,GaliandGertler,1999)bydiscussingthefollowingcoreeconomicprinciples:

•Pricestabilityhasimportantbenefitsandisprimarilytheresponsibilityofacentralbank.

•Thereisnolong-runtradeoffbetweenunemploymentandinflation,butashort-runtradeoffexists.

•Expectationsplayacrucialroleinthemacroeconomyandtheroleofexpectationscancreatetime-inconsistencyproblemsthatimpairachievementofpricestability.A

transparentpolicyframeworkformonetarypolicycanconstraindiscretionarybehaviorandalleviatesomeofthetime-inconsistencyproblems.

•Centralbankindependencepromotespricestabilityandeconomicperformance,inpartbyaddressingtime-inconsistencychallenges.

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23.2.1PriceStabilityhasImportantBenefitsandistheResponsibilityofaCentral

Bank

Withtheriseofinflationinthe1960sand1970s,economists,andalsothepublicandpoliticians,begantodiscussthehighcostsofinflation(forexample,seethesurveysinFischer,1993;

AndersonandGruen,1995;andKiley,Mauskopf,andWilcox,2007).Highinflationunderminestheroleofmoneyasamediumofexchangebyactingasataxoncashholdings.Ontopofthis,ahigh-inflationenvironmentleadstooverinvestmentinthefinancialsector,whichexpandstohelpindividualsandbusinessesescapesomeofthecostsofinflation(English,1996).Theinteraction

ofthetaxsystemandinflationalsoincreasesdistortions—forexamplethroughlackofindexationofcapitalgains—thatadverselyaffecteconomicactivity(Feldstein,1997).

Unanticipatedinflationcausesredistributionsofwealththatharmsomehouseholdsorsectors

andbenefitothers,potentiallycausingeconomicorpoliticalspillovers(forexample,DoepkeandSchneider,2006aand2006b).

Inflationalsoleadstouncertaintyaboutrelativepricesandthefuturepricelevel,makingit

harderforfirmsandindividualstomakeappropriatedecisions,therebydecreasingeconomic

efficiency(e.g.,Lucas,1972,Briault,1995).Economistshaveobservedacorrelationbetween

thelevelandthevolatilityofinflation,withthelatterservingasaproxyforuncertainty(for

example,Okun,1971;Kiley,2007;andCecchettietal,2023).Inaddition,nominalrigiditiesandstaggeredwageandpricesettingimplythatinflationcreatesdispersioninrelativepriceswhichis

inefficient,loweringactivityandharmingwelfare;whilethischanneliscentralinNew-

Keynesianmodels(forexample,Woodford,2003),empiricalanalysisdoesnotclearlysuggestthischannelislarge(forexample,Nakamuraetal,2018).

Finally,therearebehavioralcostassociatedwithhighinflation.Somehouseholdsundoubtedlydonotfullyunderstandtheimplicationsofageneraltrendinprices—thatis,theymaysuffer

fromnominalillusion—makingfinancialplanningmoredifficult.Thisisconsistentwithsurveyevidenceshowingthatthepublicstronglydislikesinflation(forexample,Shiller,1997).

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Thetotaleffectofthesedistortionsbecamemorefullyappreciatedoverthecourseofthe1970s,

andtherecognitionofthehighcostsofinflationledtotheviewthatlowandstableinflationcanincreasethelevelofresourcesproductivelyemployedintheeconomy.

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Thedeleteriouseffectsofinflationoneconomicefficiencyimpliesthatthelevelofsustainableemploymentisprobablylowerathigherratesofinflation.Thus,thegoalsofpricestabilityandhighemploymentare

likelytobecomplementary,ratherthancompeting,overthemediumandlongrun.

Atthesametime,thehighlevelofinflationinthe1970sledeconomistsandpolicymakerstoexaminethepoliciesmostappropriateforcontrollinginflation.Inthe1970s,theroleofsupplyfactorsindrivingupinflationanduncertaintyabouttherelationshipbetweeninflationand

economicactivitycontributedtoasense,insomeanalyses,thatinflationwasnotamonetaryproblem.Asaresult,alternativeapproaches,suchaspriceorwagecontrols,wereconsidered.

Forexample,theNixonAdministrationimposedpricecontrolsintheearly1970s.Theseeffortstemporarilyloweredinflation,butinflationreturnedaftertheirremoval.Tobin(1980)arguedthatloweringinflationthroughmonetarypolicywouldbeexcessivelycostlyandthatwageandpricecontrolswereanappropriatetool.However,overtime,aconsensusemergedthatmonetary

policywasthekeyfactorininflationovermedium-termhorizons.Amongotherfactors,therapidityoftheVolckerdisinflationintheearly1980s,agrowingappreciationfortheroleof

expectations(discussedbelow),andadditionalcross-countryevidencewhichsupportsa

nominal-anchor-cementedmonetarypolicyasthekeymedium-termfactorininflationdynamicsandtherebyemphasizedthatinflationcontrolisprimarilytheresponsibilityofacentralbank.

23.2.2NoLong-RunTradeoffBetweenUnemploymentandInflation

Aninfluentialpaperpublishedin1960byPaulSamuelsonandRobertSolow(1960)arguedthatworkbyA.W.Phillips(1958),whichbecameknownasthePhillipscurve,suggestedthattherewasalong-runtradeoffbetweenunemploymentandinflationandthatthistradeoffcouldbe

exploited.Underthisview,thepolicymakerwouldhavetochoosebetweentwocompeting

2Afurtherpossibilityisthatlowinflationmayevenhelpincreasetherateofeconomicgrowth.Whiletime-series

studiesofindividualcountriesandcross-nationalcomparisonsofgrowthratesarenotintotalagreement(AndersonandGruen,1995),theconsensusisthatinflationisdetrimentaltoeconomicgrowth,particularlywheninflationratesarehigh.

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goals--inflationandunemployment--anddecidehowhighaninflationrateheorshewouldbewillingtoaccepttoattainalowerunemploymentrate.

ThetradeoffsuggestedbySamuelsonandSolowwashotlycontestedbyMiltonFriedman(1968)andEdmundPhelps(1968),whoindependentlyarguedthattherewasnolong-runtradeoff

betweenunemploymentandtheinflationrate:Rather,theeconomywouldgravitatetoanaturalrateofunemploymentinthelongrunnomatterwhattherateofinflationwas.Inotherwords,thelong-runPhillipscurvewouldbevertical,andattemptstolowerunemploymentbelowthenaturalratewouldresultonlyinhigherinflation.TheFriedman-Phelpsnaturalratehypothesiswas

immediatelyinfluentialandwasquicklyincorporatedinformaleconometricmodels.

23.2.3ImportanceofExpectationsandtheTime-InconsistencyProblem

AkeyaspectoftheFriedman-Phelpsnaturalratehypothesiswasthatsustainedinflationmayinitiallyconfusefirmsandhouseholds,butinthelongrunsustainedinflationwouldnotboostemploymentbecauseexpectationsofinflationwouldadjusttoanysustainedrateofincreaseinprices.Startingintheearly1970s,therationalexpectationsrevolution,launchedinaseriesofpapersbyRobertLucas(1972,1973,and1976),tookthisreasoningastepfurtherand

demonstratedthatthepublicandthemarkets’expectationsofpolicyactionshaveimportanteffectsonalmosteverysectoroftheeconomy.

3

Asaresult,thesystematiccomponentof

policymakers’actions--i.e.,thecomponentthatcanbeanticipated--playsacrucialroleintheconductofmonetarypolicy.

4

Indeed,themanagementofexpectationsaboutfuturepolicyhasbecomeacentralelementofmonetarytheory,asemphasizedinWoodford(2003).

Whilethereisnolongruntradeoffbetweenunemploymentandinflation,thereisashort-runtradeoffthatcanleadtothetime-inconsistencyproblem(KydlandandPrescott,1977,Calvo,

3NotethatalthoughMuth(1961)introducedtheideaofrationalexpectationsmorethantenyearsearlier,hisworkwentlargelyunnoticeduntilresurrectedbyLucas.

4Indeed,oneimplicationofrationalexpectationsinaworldofflexiblewagesandpriceswasthepolicy

ineffectivenessproposition,whichindicatedthatifmonetarypolicywasanticipated,itwouldhavenorealeffectonoutput;onlyunanticipatedmonetarypolicycouldhaveasignificantimpact.Althoughevidenceforthepolicy

ineffectivenesspropositionturnedouttobeweak(Barro,1977;Mishkin,1982a,b,1983),therationalexpectationrevolution’spointthatmonetarypolicy’simpactontheeconomyissubstantiallyinfluencedbywhetheritis

anticipatedornothasbecomewidelyaccepted.

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1978,andBarroandGordon,1983).Thetime-inconsistencyproblemariseswhenmonetarypolicyisconductedonadiscretionarybasis.Policymakersmayfindittemptingtoexploitashort-runPhillipscurvetradeoffbetweeninflationandunemploymentbyseekinglower

unemploymentthroughsurpriseinflation.Privateagents,cognizantofthistemptation,willadjustexpectationstoanticipatetheexpansionarypolicy,resultinginhigherinflationwithnoshort-runincreaseinemploymentInotherwords,withoutacommitmentmechanism,monetarypolicy

makersareunabletomanageexpectationsforlowinflationbecauseprivateagentswill

understandthatlowinflationisnotconsistentwiththetemptationofpolicymakerstoengenderasurpriseinflation;thatis,policyintentionstopursuelowinflationcanbetime-inconsistentand

sowillsoonbeabandoned.Thetime-inconsistencyproblemofdiscretionarymonetarypolicyhasledtoimportantinsightsregardingcentralbankgovernanceandbehaviour.

Thetime-inconsistencyproblembroughttotheforetheroleofrulesversusdiscretioninthe

settingofmonetarypolicy.Thisdebatehasbeenalongstandingone.

5

Arulerequiresthat

monetarypolicyisessentiallyautomatic:itinvolvesapreciseprescriptionforhowmonetary

policyreactstoasetofeconomiccircumstances.Oneexampleofamonetarypolicyruleisthe

constant-money-growthruleadvocatedbyMiltonFriedman,inwhichthemoneysupplyissetbythecentralbanktogrowataconstantrate.AmorerecentalternativeistheclassicTaylor(1993)ruleinwhichthepolicyinterestrate,thefederalfundsrate,issettobeaweightedaverageofanoutputgap(actualoutputminuspotentialoutput)andaninflationgap(actualinflationminusthetargetinflationrate).Theoppositeofamonetarypolicyrule,accordingtothetraditional

classificationofpolicyregimes,isdiscretion.Discretion,initspuristform,involvesmonetarypolicymakerssettingtheirpolicyinstrumentsonaday-to-daybasisaseconomiceventsunfold,withnopubliccommitmentsabouttheirobjectivesoractions.

Asanillustrationofthedebateandchallengesassociatedwithrules,theearly2000sexperienceintheUnitedStatesandothercountriesisinstructive.Taylor(2007)arguesthatexcessively

loosemonetarypolicycontributedtoaglobalhousingbubbleandtheglobalfinancialcrisisof2008.Dokkoetal(2011)lookacrossawidenumberofcountriesandfindlittleevidencethatdiscretionarymonetarypolicycontributedsignificantlytothehousingbubble.Mishkin(2018)

5SeeMishkin(2018)foramoredetaileddiscussionontherulesversusdiscretiondebatediscussedhere.

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conductsanexercisewhichevaluateshowwellatraditionalTaylor(1993)rulewouldhave

performedduringtheglobalfinancialcrisisanditsaftermath.Toillustratethesepoints,figure23-1presentstheprescriptionsfromtheTaylor(1993)rule(equation(1),inwhichthenominalshort-terminterestrate,it,isafunctionofinflation,πt,andtheoutputgap,yt.

Equation1

it=2+πt+0.5(πt−2)+0.5yt.

Figure23-1:FederalfundsrateandprescriptionsfromtheTaylorrule

Source:Authors’calculationsandBoardofGovernorsoftheFederalReserveSystem(US),FederalFundsEffectiveRate

[FEDFUNDS],retrievedfromFRED,FederalReserveBankofSt.Louis;

/series/FEDFUNDS;

U.S.

CongressionalBudgetOffice,RealPotentialGrossDomesticProduct[GDPPOT],retrievedfromFRED,FederalReserveBank

ofSt.Louis;

/series/GDPPOT;

U.S.BureauofEconomicAnalysis,RealGrossDomesticProduct

[GDPC1],retrievedfromFRED,FederalReserveBankofSt.Louis;

/series/GDPC1;

U.S.Bureauof

EconomicAnalysis,GrossDomesticProduct:ImplicitPriceDeflator[GDPDEF],retrievedfromFRED,FederalReserveBankofSt.Louis;

/series/GDPDEF;

U.S.BureauofEconomicAnalysis,PersonalConsumptionExpenditures:

Chain-typePriceIndex[PCEPI],retrievedfromFRED,FederalReserveBankofSt.Louis;

/series/PCEPI.

AllretrievedOctober17,2023.

ThefederalfundsratewassomewhatbelowtheprescriptionsoftheTaylorruleintheearly

2000s,butthegapwasnotlargebyhistoricalstandards.Andoverthecourseofthe2010stheruleconsistentlyprescribedafundsrateabovetheactualfundsrate;however,inflationand

economicactivitywerearguablybelowtargetandfullemploymentformuchofthisperiod(Clarida,2021),highlightinghowstrictadherencetoarulemayhaveledtopolicymistakes.

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Furthermore,theTaylorruledidnotprescribetheFed’spreemptiveloweringofthefundsrateintheearlystagesoftheglobalfinancialcrisisandtheCovidpandemic.TheseexercisessuggeststhataTaylorrulewouldhaveperformedsuboptimally,bynotloweringinterestratessufficientlyattheoutsetofthesecrisesandthenraisinginterestratesfartooquicklyintheaftermathoftheglobalfinancialcrisis.TheTaylorruledidnottakeaccountofthefinancialdisruptionsthatwereanimportantfactorintheevolutionoftheeconomyatthattimeandthatwerelargelyabsent

fromthecoremodelsusedatcentralbanks(seeMishkin,2011).DespitethelimitationsoftheTaylorrule,theruledoescapturethebroadcontoursofhistoricalpolicy,whichsuggeststhat

referencetopolicyrulesmayinformpolicydiscussions.Forexample,thedeviationswereverylargein2021.

BernankeandMishkin(1997)arguesthattherules-versus-discretiondebatehasbeenmiscast

becausethedichotomybetweenrulesanddiscretionistoosimple.Advocatesofrulesargue

againstpurediscretion,whileadvocatesofdiscretionargueagainstrigidrules.Bernankeand

Mishkin(1997)arguedthatbyimposingastructurethatimposesdisciplineonmonetarypolicy,butdoesnoteliminateflexibility,whattheycalledconstraineddiscretion,monetarypolicycouldavoidsomeofthedisadvantagesofeitherrigidrulesorpurediscretion.Constraineddiscretionisanattempttoachievethebestofbothrulesanddiscretionbymakingdiscretionhaverule-like

properties,mitigatingthetime-inconsistencyproblem.Anapproachofconstraineddiscretionconsiderstheprescriptionsofsimplepolicyrules,augmentedwithjudgment.

23.2.4CentralBankIndependence

Thepotentialproblemoftime-inconsistencyhasledtoagreatdealofresearchthatexaminestheimportanceofinstitutionalfeaturesthatcangivecentralbankersthecommitmentmechanismstopursuelowinflation.Perhapsthemostsignificanthasbeenresearchshowingthatcentralbank

independence,atleastalongsomedimensions,islikelyveryimportanttomaintaininglow

inflation.However,itisimportanttodistinguishbetweentwotypesofindependencemadeby

DebelleandFischer(1994)andFischer(1994).Goalindependenceistheabilityofthecentral

banktosetitsowngoalsformonetarypolicy,whileinstrumentindependenceistheabilityofthecentralbanktoindependentlysettheinstrumentsofmonetarypolicytoachieveitsgoals.

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Centralbankinstrumentindependencecanhelpinsulatecentralbanksfromshort-runpressures

toexploitthePhillips-curvetradeoffbetweenemploymentandinflationandthusavoidthetime-inconsistencyproblem.

6

Evidencesupportstheconjecturethatmacroeconomicperformanceisimprovedwhencentralbanksareinstrumentindependent.Whencentralbanksinindustrializedcountrieswererankedfromleastlegallyindependenttomostlegallyindependent,theinflationperformancewasfoundtobethebestforcountrieswiththemostindependentcentralbanks

(AlesinaandSummers,1993;Cukierman,1993;Fischer,1994;andthesurveysinForder,2000,andCukierman,2006).

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Althoughthereisastrongcaseforinstrumentindependence,whichismorecommon,thesameisnottrueforgoalindependence.Ifthegoalsofmonetarypolicyaresetbytheelectedgovernment,thenthedemocraticprinciplesthatthepublicexercisescontrolovergovernmentactionsand

holdspolicymakersaccountablehasbeensatisfied.Althoughbasicdemocraticprinciplesargueforthegovernmentsettingthegoalsofmonetarypolicy,thequestionofwhetheritshouldset

goalsfortheshort-runorintermediate-runismorecontroversial.Forexample,anarrangementinwhichthegovernmentsetashort-runinflationorexchangeratetargetthatwaschangedevery

monthoreveryquartercouldeasilyleadtoatime-inconsistencyprobleminwhichshort-run

objectiveswoulddominate.Inpractice,however,thisproblemdoesnotappeartobesevere:forexample,inmanycountriesinwhichthegovernmentsetstheannualinflationtarget,thetargetisrarelychanged.

Instrumentindependencegenerallycallsforprocessestoholdthecentralbankaccountableforachievingitsobjectives.Themoststraightforwardapproachtosuchaccountabilityis

6Foranexampleofhowthetime-inconsistencyproblemcanbemodeledasresultingfrompoliticalpressure,seeMishkinandWestelius(2008).

7Acasestudythatprovidesastrikingexampleofthebenefitsofinstrumentindependenceoccurredwiththe

grantingofinstrumentindependencetotheBankofEnglandinMayof1997(MishkinandPosen,1997;Bernanke,Laubach,MishkinandPosen,1999);beforethatdate,theChancelloroftheExchequer(thefinanceminister)setthemonetarypolicyinstrument,nottheBankofEngland.During1995-96theU.K.retailinflationrate(RPIX)was

fairlycloseto3percent,butthespreadbetweennominalandindexedbondyields--referredtoas10-yearbreakeveninflation--wassubstantiallyhigher,intherangeof4percentto5percent,reflectinginvestors’inflationexpectationsaswellascompensationforperceivedinflationriskata10-yearhorizon.Notably,breakeveninflationdeclined

markedlyonthedaythatthegovernmentannouncedtheBankofEngland’sindependenceandhasremainedsubstantiallylowereversince.

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transparencyinthesettingofitsinstrumentstoachieveitsobjectives.Asaresult,itiscommonforindependentcentralbankstopublishmonetarypolicyorinflationreports.Thetrendtowardgreatercentralbankindependencehasbeenaccompaniedbygreatertransparencyonthepartofcentralbanks(forexample,DincerandEichengreen,2014).

23.3CentralBankMandates

Thecoreobjectiveofcentralbanksispricestability.Aroundtheworld,thismandatefor

monetarypolicyisgovernedbydifferentarrangements,withadifferentdegreeoffocusonthecomplementarygoalsofeconomicstabilityandpricestability.Ourreviewofmonetarypolicymandatesfocusesonthesestructures.Inaddition,financialstabilityfactorsareimportantforpriceandeconomicstability,andwedevoteconsiderablespacetotheseconsiderations.We

concludewithrecentresearchonothermandatesthathavebeendiscussedrecently.

23.3.1MonetaryPolicyMandates

Twotypesofmonetary-policymandatesforcentralbanksarecommon:hierarchicalanddualmandates.Becausemonetarypolicyistheprimarydeterminantofinflationoverthelongrun,

manycountrieshavedecidedthatthemandateforacentralbankfocusonpricestability.For

example,theMaastrichtTreaty,whichcreatedtheEuropeanCentralBank,states,“TheprimaryobjectiveoftheEuropeanSystemofCentralBanks[ESCB}shallbetomaintainpricestability.Withoutprejudicetotheobjectiveofpricestability,theESCBshallsupportthegeneral

economicpoliciesintheCommunity,”whichincludeobjectivessuchas“ahighlevelof

employment”and“sustainableandnon-inflationarygrowth.”Mandatesofthistype,whichputthegoalofpricestabilityfirstandthenstatethatothergoalscanbepursuedifpricestabilityisachieved,areknownashierarchicalmandates.OthercentralbankswithhierarchicalmandatesincludetheBankofEngland,theBankofCanada,andtheReserveBankofNewZealand.

Incontrast,thelegislationthatdefinesthemissionoftheFederalReservestates,“TheBoardofGovernorsoftheFederalReserveSystemandtheFederalOpenMarketCommitteeshall

maintainlong-rungrowthofthemonetaryandcreditaggregatescommensuratewiththe

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economy’slong-runpotentialtoincreaseproduction,soastopromoteeffectivelythegoalsof

maximumemployment,stablepricesandmoderatelong-terminterestrates.”Becausemoderatelong-terminterestratesrequirethatinflationbekeptlow,thestatementinpracticeisadual

mandatetoachievetwocoequalobj