Analysis of Financial Stability

On the macro-economic policy side of Central Banking a remarkable consensus has been emerging over the last two decades. This covers both the applicable theoretical framework for analysing the transmission mechanism of monetary policy and also the appropriate institutional structure for the Central Bank to deploy its macro-economic policies. The consensus about the latter structure generally involves a high degree of operational independence (from Government); the de facto selection of price stability as the primary objective, (except in those countries on a pegged, or fixed exchange rate, or in a currency union); and the choice of a short term interest rate, selected on pre-announced dates within the context of a forward-looking forecasting structure, as the main instrument. When some country strays from this consensus, for example when Poland or Venezuela seeks to curtail its Central Bank’s operational independence, or when a (French?) politician casts doubt on the primacy of the price stability objective, you can almost hear the sharp intake of breath amongst the worldwide ‘club’ of central banks and at its focal point at the Bank for International Settlements (BIS) in Basel.