Busting The Central Bank Myth

What is the correct role for central banks?

Coronavirus has taken what we’ve known them to be — highly technical and a-political — and turned the notion on its heads, according to ForeignPolicy.com

While COVID-19 has reaffirmed the assumption that central banks are the first responders of economic policy, it has brought to light how exposed they are to the market. Unlike Treasuries, which hold power through taxation and government spending, central banks are largely left to their own devices.

“Money created by central banks only shows up on their balance sheets, not in the debt of the state,” writes Adam Tooze. “Central banks don’t need to raise taxes or fund buyers of their debt. This gives them huge power.”

As the role of the central bank expands, central bankers have been able to set monetary policy as they saw fit, often aiming to bring down inflation while attempting to instil confidence in monetary stability.

And it’s seemingly worked; until now. With COVID-19 wreaking havoc on the economy, the assumptions central bankers once operated on have uncovered previous policies’ lack of science. It is crucial central bankers surrender their assumptions about the economy and use the current situation to inform their approach in the coming years.

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