On climate, jobs and financial stability: Towards a new mandate for central banks?
Forum New Economy, 2021
There was a time when the world still seemed a good – and above all simple – place for monetary authorities. Every few weeks, they had to decide whether, in view of the latest price developments, it would be better to raise the key interest rates by a quarter point – or not. That was a long time ago. Today, central bankers are in demand whenever banks are in crisis or investors flee government bonds. What’s more, they could even help save the climate, ECB chief Christine Lagarde admits. Don’t the monetary guardians need a new mandate right away? This highly sensitive question was the subject of day 3 of the VIII. New Paradigm Workshop organised by Forum New Economy. ECB Director Isabel Schnabel gave a keynote speech on the extent to which central banks can (co-)bear social responsibility – without losing their independence. Afterwards, Adam Tooze raised the question of whether the ECB might not be best served with a new mandate – because it has no choice but to worry about the stability of financial markets, the drifting apart of wealth, or saving the climate. In the Forum study he presented, Moritz Schularick described how the guiding principles and paradigms of central banks can change. The discussion was moderated by Laurence Tubiana, professor of economics and CEO of the European Climate Foundation.
Comment from our editors:
Central banking representative Isabel Schnabel argues in this panel how independent central banks are already doing their bit to uphold their social responsibility by way of attempting to solve the time consistency problem of prices. The ECB needs to find a balance between what is feasible within this primary mandate and what is possible in reference to EU's primary law and the treaties, esp. in relation to the principles of proportionality and open market economy imposing additional constraints on potential monetary policies in the area of climate protection. It is however being recognised that climate change remains a macro-systemic risk to price stability in the long run. Economic historian Adam Tooze finds then a certain lopsidedness in the apparent strategic claim of distributional neutrality and the actual distributional consequences of monetary policy. Political economist Moritz Schularick points first to a trade-off and the contradictory effects monetary policy can have: a more accommodative, loose policy brings the lower strata of society back into the labour market and may have a positive impact on income distribution but at the same time tends to adversely impact the distribution of wealth (benefitting disproportionally the upper strata). His second remark is on the question of time consistency and the issue of the stabilisation of the business cycle and financial markets: as central banks take upon themselves the role of the last insurance of aggregate risk in the economy, does it not invite more risk-taking in the economy resulting in an ever larger leverage pyramid build-up, making it in turn ever more harder to find appropriate stabilisation measures? The floor of discussion opens at minute 45:20.