Challenges for Central Banking: An Introduction

Abstract

The rapid development of financial markets requires that central banks reformulate, or at least re-evaluate their current practice. There are several reasons for this. First, with innovations in financial markets changing both the instruments that are traded and the institutions that are active in those markets, the effect of some of traditional central banks tools may have changed substantially, and entirely new instruments may be needed. Second, because of the rapid expansion of the financial sector some areas of current concern, such as financial stability and the evolving payment system, seem to be more pertinent today than in the past. Third, there may well have been a paradigm change in the theory and practice of macroeconomic policy. Many central banks now receive clearly defined responsibility for price stability, and increased independence from the government to fulfil that task. Other potential social objectives of central banking, such as full employment, trade balance and exchange rate stabilisation have been given less weight than earlier in the post World War II period. Fourth and finally, modern central banking is heavily influenced by increased international integration, sometimes called “globalisation.” This makes it less useful to define separate sets of rules for both monetary policy and financial market regulation for different countries.