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Financial Stability in the broader Mandate for Central Banks

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Financial Stability in the broader Mandate for Central Banks

A Political Economy Perspective

Brookings Institution,

5 min read
5 take-aways
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An economist offers proposals for enabling prudent central banking within a political context.

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7

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Recommendation

When greed looks for ways to evade sensible regulation and economic efficiency in search of profits, it can lead to big problems. Economist Viral Acharya acknowledges that regulating the financial sector can be a race among the rule makers, the politicians with vested interests, and the moneymen looking for loopholes. Yet Acharya’s proposals for enabling prudent central banking within a political context, though not new, make good economic sense. getAbstract recommends his timely report on how to design realistic regulation to policy makers and central bankers.

Summary

Central banks must always balance politics and economics. The greatest mechanisms for guiding an economy will be ineffective if their use undermines a central bank’s long-term independence or if the fear of such an outcome prevents central bankers from acting.

Promoting financial stability through good times and bad is a central bank’s basic aim. But central bankers suffer from an “inherent time-inconsistency problem,” in which policies deemed desirable in the present can cause problems later. For example, an economy recovering from a crisis needs a strong financial sector, so the central bank may bail out troubled...

About the Author

Viral Acharya is an economics professor at New York University’s Stern School of Business.

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