IMFS Conference on Monetary and Financial Stability 2013

Economic and Legal Limits of Central Banking

In response to the global financial crisis of 2007 and 2008, the subsequent widespread downturn in economic activity and prolonged disturbances in the financial sector the central banks of major industrialized countries have employed conventional and unconventional policy measures on an unprecedented scale. While it is widely acknowledged that these measures have contributed to stabilizing financial and economic conditions, many questions remain concerning their long-run consequences and how (and when) central banks should exit from these policies. Unconventional measures taken in the crisis may have potentially dangerous after effects that will remain difficult to resolve. Moreover, there is considerable disagreement on the appropriate monetary policy regime in the after-crisis period, sometimes also labeled the period of a “new normal”. Similarly controversial are the questions to which extent and in which form central banks should be involved in stabilizing financial markets and how serious the fiscal implications of some of the unconventional monetary policy measures are.

The IMFS Conference on Monetary and Financial Stability of this year aims to assess these questions and explore to what extent central banks are able to achieve the potentially conflicting objectives. It is also to be scrutinized to which degree the existing legal frameworks allow central banks to pursue these objectives and take the respective policy measures. In this sense, the event will strive to illuminate the “economic and legal limits of central banking”.

As at previous occasions, the conference program follows a distinctively interdisciplinary approach and has been structured to cover relevant economic, political and legal aspects and elicit viewpoints from a diverse group of leading policy makers and academics.

Recent scholarly work on the economic and legal limits that central banks face while coping with the present problems and the practical experience of policy makers will be discussed in three keynote speeches and topical sessions.

The opening session will take a deeper look into the fiercely debated separation of fiscal policy from monetary policy in the European Monetary Union and its demarcation. It may cover questions such as:

  • To which extent do unconventional policy measures, such as the OMT, represent fiscal rather than purely monetary policy measures?
  • What measures do existing legal frameworks allow for? What would be the legal scope for changes of this framework (if economically desirable)?
  • Will an amendment of the primary law of the EU and/or the constitutional law of the Member States be a solution? Can the concerns from the very core of the democratic state be mitigated this way?
  •  Have the policy measures adopted caused moral-hazard problems for policy? If so: How serious and harmful have these problems been?
  • To which extent have central banks (voluntarily?) given up some of their independence by providing emergency liquidity assistance? Will they not expose themselves to growing political pressure?
  • Will they not lose the desperately needed reputation in an environment of “fiat money” in case they take questionable measures from the domain of fiscal policy? What will happen when these measures fail?

The second session is dedicated to a discussion of the monetary policy measures that were adopted to deal with the recent global financial and economic crisis. It will also examine whether the unconventional monetary policies of the present period can be considered as a “new normal”. Relevant questions include:

  • How effective have the monetary policy measures been in the course of the crisis?
  • What are potential (long-run) risks of these measures?
  • What will be the downsides of the (inevitable) exit from the unconventional policy measures? How can it be managed to minimize the foreseeable negative effects?
  • Which competences and powers does a central bank need in the times of a „new normal“?

The third session will focus on the role that central banks can or should play in securing financial stability and supervising the banking sector.  Issues that fall under this domain include the following questions:

  • Is there a role for a „leaning-against-the-wind“ policy by central banks? If so: How should it look like?
  • What should be the role of central banks in financial supervision?
  • How serious are the conflicts of interests of central banks which are involved in financial supervision? How to deal best with these conflicts?
  • What are the prospects for the planned SSM? Can it resolve the fundamental problems [the inherent instability] of the present financial architecture?
  • Can the comprehensive guarantees of central bank independence be justified in view of sovereign powers a supervisory agency has to exert
  • Is financial stability a sufficient ground for the infringement of democratic principles?

The summary as pdf file