Volume 13, Issue 2 - Central Banking: Current Challenges and Future Perspectives

Conventional understanding relegates the role of central banking to benchmark interest rate guidance which is supposed to have direct and straightforward impact on real economy. Accordingly, central banks are praised for and supposed to stay independent from treasuries and money markets while indirectly influencing both of them by that guidance. This article provides hints for an alternative explanation by investigating central bank dual connection with treasuries and private finance, especially money markets. It recounts the main financial episodes of the last decades from this institutional monetary economic perspective through a dynamic systems analysis covering money and financial aggregates, pointing to the peculiar ways in which this connection has been organised under the market-based (asset-based) finance regime and its systemic failure since 2007.

Compared to the history of money and banking, the history of central banking is fairly brief and has been influenced by the development of modern nation states, by the economic environment and by technological advances. Accordingly, on-going innovations in digital technologies and the globalization of the economy are expected to have significant impacts on central banking in the future. Since all the core activities of central banking, such as the issuance of money, the operation of settlement systems, its function as lender of last resort and its monetary policy, are based upon “trust”, its history has been, and its future will also be, closely linked to the most efficient framework in terms of building trust and reflecting changing technological and institutional conditions. Even though digital innovation may influence the styles of central banks in the future, the relevance and effectiveness of their payment and settlement infrastructures, their function as lenders of last resort and their monetary policies will be maintained. Besides, the need for risk-free central bank money will remain strong on account of its capacity to reduce risks in economic transactions, and central banks will have to continue making efforts to meet these demands through the enhancement of the utility of their infrastructure, including real-time gross settlement systems. Regarding central bank digital currencies, many issues require further examination. The future of central banking will be closely interlinked with that of nation states and depends on its capacity to identify the ideal mode of utilizing information and data in the economy.

Over the last years, independent central banks were often criticized. Many critics felt that the fatal flaw of the current system lied in its independent nature. Some critics argued that the remedy to such problems was to replace independence with interdependence. Such a drastic measure is completely unnecessary. No more time should be lost discussing further the merits or the weaknesses of central bank independence. But taking central bank independence as a given, one should simply try to equip central bankers with the mandates, the tools, and the values best fitted to help them face future shocks. Deeper checks and balances with other institutions and the fair financing of investment by all economic agents, including startups and SMEs, are urgently necessary to head off financial crises that will inevitably arise in this era of growing wealth inequality, disruptive technologies and climate change.

Two major economic crises in the early twenty-first century have had a serious impact on monetary policy and CB independence. Disruption in financial intermediation and associated deflationary pressures caused by the global financial crisis of 2007–2009 and European financial crisis of 2010–2015 pushed central banks (CBs) in major currency areas towards adoption of unconventional monetary policy measures, including large-scale purchase of government bonds (quantitative easing). The same approach has been taken by CBs in response to the COVID-19 crisis in 2020 even if the characteristics of this crisis differ from the previous one. As a result of both crises, CBs have become major holders of government bonds and de facto  – main creditors of governments. Against rapidly deteriorating fiscal balances, CBs have become hostages of fiscal policies, which compromises their independence. Risks to the CB independence also come from their additional mandates (beyond price stability) and populist political pressures.

In July 2021, the European Central Bank (ECB) published a new monetary policy strategy, the first time in 17 years that it had undertaken a review of its monetary policy. In the intervening time, the world – and the economic challenges facing the ECB – have changed immensely but partly as a result of the ECB’s own maneuvering. In particular, monetary policy has been relied upon for every single malaise facing the global economy, including and up to the coronavirus pandemic. This paper argues that a review of central banks as an institutional mechanism in general, and in particular the ECB, was overdue but should not have been limited to policies; instead, an opportunity was missed to have an institutional review to examine whether or not it has been performing as intended. In particular, the vast experiment of unconventional monetary policy/issuance should have been more scrutinized from an institutional level as it appears to have contributed to the current problems the European economy faces. Europe and the ECB would be well served by taking stock of its actions over the past two decades and especially during the era of unconventional monetary policy to find a sustainable route forward.

The Visegrad Group is a regional form of cooperation of four Central European states, i.e. Poland, the Czech Republic, Slovakia, and Hungary. The above states have been members of the European Union since 2004. What is more, the Visegrad Group is recognized as an alliance and forum for exchanging experiences and developing common positions on matters of particular importance for the future of the region and the European Union. The constitutional provisions of the Visegrad Group states regarding the legal and constitutional status of a central bank were analysed and compared on the basis of analogies and differences. Importantly, today central banks play a significant role in the socio-economic and political system of a state. In particular, the article contains an innovative approach to the subject by comparing the subject matter from the perspective of constitutional regulations. The considerations are based on both the literature of scientific representatives and constitutional regulations, creating a complete and original presentation of the issue.

Financial Citizenship addresses the new era of central banking by focusing on the conflicts over central banking legitimacy in order to ultimately provide “a new theory and practice of legitimacy” for central bankers. In this article, I summarize first how Riles accounts for the “culture clash” between central bankers and the public, and how she aims to solve these tensions with the concept of financial citizenship. Second, I argue that the book has missed one of the main problematic dimension of contemporary central banking, which is the rise of private financial power. I also contend that the analysis of the “populist backlash” lacks empirical underpinning and that the concept of “financial citizenship” is unlikely to restore central banks’ legitimacy.