Challenges for Central Banks In the Context of the Crisis

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Challenges for Central BanksIn the Context of
the Crisis

• Dr. D. Subbarao
• Governor
• Reserve Bank of India

RBIs International Research Conference Mumbai Feb
ruary 12, 2010
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Task for Central Banks

• Distil lessons of crisis and institute reforms
• This involves change in what central banks do and
  how they do it.

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• Address
• five challenges
• for central banks

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First Challenge
Managing Monetary Policy in a Globalizing
Environment

• Global crisis requires global response
• Global factors will impact on central bank policy
  decisions
• Extent of challenge depends on the breadth of
  central banks mandate

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Second Challenge
Redefining the Mandate of Central Banks

• (i) Should central banks persist with inflation
  targeting?
• What is the role of the central banks in
  preventing asset price bubbles?
• (iii) Should central banks also be doing
• regulation and supervision of banks?

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Should central banks persist with inflation
targeting?

• Inflation targeting seemed successful resulting
  in Great Moderation
• Post-crisis, consensus on inflation targeting
  diluted, if not dissolved

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What is the role of central banks in preventing
asset price bubbles?

• Greenspan orthodoxy on asset bubbles
• Crisis has dented the credibility of Greenspan
  orthodoxy
• Monetary or regulatory action to prevent asset
  price bubbles?

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Should central banks also be doingbank
regulation and supervision?

• Variety of regulatory models around the world
• Arguments in support of central banks doing bank
  regulation and supervision
• Arguments against

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Third Challenge
Responsibility of Central Banks Towards Financial
Stability

• How does one define financial stability?
• Should central bank mandate include financial
  stability?
• Should financial stability be an exclusive or
  shared responsibility?
• Do central banks have the necessary instruments?
• Does responsibility for financial stability
  encroach on the independence of central banks?

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Fourth Challenge
Managing the Costs and Benefits of Regulation

• Post-crisis agenda dominated by regulatory
  reforms
• Regulation has costs
• Balancing costs and benefits of regulation is the
  challenge

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Fifth Challenge
Managing the Balance Between Autonomy and
Accountability of Central Banks

• To start with, fiscal dominance of monetary
  policy
• During 1980s fiscal dominance yielded to
  independent inflation targeting central banks
• Financial stability mandate does it erode
  central bank independence?
• Transparent, responsive, accountable behaviour on
  the part of central banks

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Conclusion
Five Challenges

• Managing monetary policy in a globalising
  environment
• Redefining the mandate of central banks
• Responsibility of central banks towards financial
  stability
• Managing the costs and benefits of regulation
• Managing the balance between autonomy and
  accountability of central banks

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By Far the Biggest Challenge for the Central
Banks

• To regain credibility

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