The role of the central bank

The important task is to ensure the long-term stability of prices and the health of the financial system. The view of the International Monetary Fund.

In recent years, some countries are trying to strengthen the policy tools of their central banks. This reflects that many countries are increasingly aware that an effective central bank can make an important contribution to economic performance. According to this development, this paper will outline some characteristics that a strong and effective central bank should have:

Clarify basic roles and responsibilities;

Only medium-term vision;

A solid professional foundation;

Public understanding.

Monetary responsibility

Although the business of central banks around the world has been highly diversified, this diversification is achieved by implementing the monetary policy that has the most extensive impact on the economy. Monetary policy makes the central bank have a great influence on a wide range of macroeconomic development, including growth, employment, inflation, interest rates, exchange rates and international payments. Of course, other economic decision-making bodies, especially the budget authorities, also have extensive influence on economic development. Without a reasonable and clear understanding of the basic responsibilities of various decision-making bodies within the government, economic performance is likely to be damaged.

For the central bank, it should be its basic duty to establish a monetary situation conducive to long-term price stability, and at the same time, it should be regarded as the most effective way to promote long-term good economic operation. In fulfilling this responsibility, the central bank is the indirect leading force to realize low and stable interest rates and stable exchange rates. Conversely, the relatively stable financial environment and price environment provide the most effective conditions for the central bank to promote long-term economic growth.

It is not easy to achieve price stability, because there are inevitable conflicts between short-term goals and medium-term goals. Financial authorities must make decisions every day, and these decisions often have a significant impact on a country's short-term economic development. A dilemma that central banks often encounter is to weigh some policy actions. Because these policy actions are to establish a good foundation for long-term price stability and long-term growth prospects, and these policy actions have a negative effect on short-term economic growth. When the inflation rate rises, efforts to tighten credit are likely to push up interest rates, which will slow down economic growth at first. However, if the central bank is prepared to perform its basic duties, it should be able to transcend these short-term negative effects and focus on the long-term goal of stabilizing prices.

Our experience from member countries also shows that if the central bank shows the ability to control inflation for a long time, it will rarely encounter serious short-term difficulties. In other words, a well-organized and credible central bank can take actions to curb inflationary pressures and avoid short-term negative impacts on economic growth and employment.

The means and methods of monetary policy regulation have been widely studied by scholars and discussed in economic journals almost every day. Paul Volcker, the former chairman of the board of directors of the Federal Reserve System, said very succinctly that the specific decisions made every day are actually quite simple: "buy or sell"; Or create or reduce liquidity. Of course, the judgments involved in making those seemingly simple decisions are very complicated and vary from country to country. It depends on the country, system and economic conditions. For example, the scale and structure of financial and money markets in a country's economy and the degree of competition among banking institutions are also important factors.

The system and economic structure of a country have a fundamental influence on the effectiveness of the independence of the central bank's monetary policy decision. The influence of the central bank on China's monetary development is very important, because it depends on the openness of the country's economy and the liquidity of capital-these factors must be considered when designing monetary policy. However, other factors will also play a key role in the success of the central bank's policies.

Other influences

An important revelation from the experience of many IMF member countries is that fiscal policy plays a central role in the ability of monetary authorities to achieve their goals. In countless countries, the increase of fiscal deficit makes the financial authorities bear great pressure to make up the deficit, and as a result, the currency, foreign exchange market and even inflation are also under great pressure. In addition, the financial authorities' decisions on expenditure and tax structure will also affect the savings level of the private sector, which will also affect the overall economic environment for making monetary policy decisions. In view of this, the International Monetary Fund recognizes the need to pay close attention to the performance of fiscal policy and the relationship between fiscal policy and monetary policy. Ideally, monetary policy and fiscal policy should be coordinated. However, in most countries, reality is often far from ideal.

In addition to fiscal policy, the ability of the central bank to pursue its goals mainly depends on the degree to which a country's economy is vulnerable to external shocks. For example, a country's economy depends on one or two basic commodities (which is often the case in low-income developing countries), so the ability of its financial authorities to maintain a stable monetary situation will be seriously challenged. In the short term, sometimes even extended to two or three years, it may be difficult to achieve liquidity growth and credit establishment conducive to longer-term price stability.

The country's financial system

Monetary policy management aimed at seeking long-term price stability is also closely related to the situation of domestic financial institutions. In many countries, including those with independent central banks, the financial decision-making of financial authorities has become very complicated in the face of the widespread risks and inability of financial institutions to repay their debts. Because of this risk, the central bank often needs to provide special liquidity support for these unlucky financial institutions in a short time.

The profound lesson that can be learned from the financial crisis in developing countries is that the implicit or explicit guarantee provided by the central bank for the operation of financial institutions should be strictly controlled. If this kind of guarantee exists, it is very important for the central bank to regulate and supervise financial institutions. Even if such supervision is carried out by other institutions, the central bank should pay enough attention to the effect and depth of supervision. As we have seen in many countries, including the United States, when financial institutions are not effectively supervised or supervised, those institutions will encounter many difficulties and lead to major financial problems. Some examples show that this will also bring extremely difficult problems to the management of monetary policy.

Another equally important lesson can be drawn from the experience of many countries, that is, the central bank's own balance sheet should be protected from the negative impact of some government actions, such as the government asking the central bank to subsidize enterprises that are unable to repay their debts, or those enterprises withdraw a lot from the central bank. This is a very heavy lesson for many countries that have difficulties in paying their debts and central banks that are forced to bear the responsibility of paying their debts. In other countries, the central bank directly or indirectly participates in providing guarantees for foreign exchange contracts of private or public enterprises, so the ups and downs of the foreign exchange market have a dramatic impact on the freedom of the central bank to manage the national liquidity and monetary situation every day. This has also brought a financial burden to the central bank. Therefore, in order to avoid financing commitments that are not reflected in the balance sheet, the openness and transparency of the central banking business are very important. In addition, the central bank should avoid assuming the responsibilities that should be borne by the financial authorities.

The efficiency and competitiveness of the financial system will also affect the ability of the central bank to implement monetary policy. This has led to financial sector reforms in many industrialized and developing countries. Their goals are: (1) to strengthen competition and improve the efficiency of resource allocation by expanding market freedom; (2) Promoting the domestic financial system and market-based interest rate structure (see article on development financing in September 1989).

Professional basis

The experience of some countries shows that the strength of the central bank and its ability to successfully perform its functions also depend on some institutional factors. First, regardless of a country's economic tendency or the degree of autonomy of the central bank, the professional quality of its staff and managers; Second, central banks need to accumulate historical knowledge. To some extent, it depends on the quality and continuity of its staff and managers, as well as the accumulated experience of important policies that have been tested. This helps banks to resist the impact of fashionable monetary policy waves from politics, business and academia; Third, it is essential for a central bank to have a solid experience base, which includes not only national economic data, but also an understanding of a country's institutional structure.

Public understanding

Another important factor related to the strength and efficiency of the central bank is the public's support and understanding of its role. This means that the central bank's business must be open and transparent, so that the public can understand how it works and have a broad understanding of its actions. Of course, this does not mean that the public must participate in daily decision-making, or know all the circumstances that affect the decision-making of buying and selling in any particular period. However, for the central bank, it is important to show its openness and sense of responsibility by issuing statements, publications and hearings in political institutions (many countries have such meetings).

The central bank authorities should also participate in public discussions on the implementation of economic decisions by other institutions within the government. To this end, the central bank must be able to independently criticize fiscal policy and other policies that are harmful to a country's economic prospects as needed. Of course, as many countries have reflected, this can only be done under certain sensitive conditions. This will help to increase the public's understanding of the objectives and operation mode of the central bank, and also help the public to understand how other changes in the economy affect the ability of financial authorities to handle their affairs. The experience of the International Monetary Fund shows that if it is not understood by the public, it will be difficult for the government to maintain the stability of economic decision-making in the process of pursuing longer-term economic growth.

Independence of the Central Bank

Some countries are trying to make legal and institutional arrangements for central banks to avoid short-term political interference. This is a good momentum. Although independence from government agencies is not necessarily a necessary condition or a sufficient condition to ensure the strong and effective central bank, independence can play an important role. At the same time, it should be pointed out that absolute independence does not exist. In fact, the effectiveness of independence and public recognition will depend on the extent to which the central bank determines its long-term responsibilities and performs its functions.

Political leaders will eventually be satisfied with the results of successful monetary policy. However, when the central bank acts independently, there will be some temporary dissatisfaction This can be reflected in the warm praise of former President Reagan who hosted a banquet for Paul Volcker when he stepped down as chairman of the Federal Reserve Board several years ago. However, when President Reagan recalled Mr. Volcker's experience in the private sector and government departments, he humorously listed that Mr. Volcker entered the Federal Reserve Bank after completing his studies, and from there he entered Chase Bank to serve David Rockefeller. Later, he went to the Ministry of Finance and served Tommy Tam, Fowler, Connery, Schultz and other ministers successively. Finally, Mr Volcker became the chairman of the board of the Federal Reserve. President Reagan said that Paul Volcker only served God in this position.