Should Central Banks Discipline Governments?

The collateral frameworks of central banks have always been a core aspect of monetary policy, […]

09/03/2020

The collateral frameworks of central banks have always been a core aspect of monetary policy, but they have rarely been subject to scholarly scrutiny. Kjell Nyborg’s (2017) recent book is a notable exception. Focusing on post-crisis central banking in Europe, Nyborg argues that market inputs to the collateral policies of the European Central Bank (ECB) are so limited that they have inadvertently undermined market discipline, to the detriment of resource allocation and economic growth and, notably, to the detriment of fiscal prudence in EU member states. Nyborg holds that the way forward in central banking is to give collateral policies a disciplinary role, such that the costs of central bank funding increase when fiscal deficits and public debt approach and surpass agreed thresholds.

Nyborg’s work is misguided, however, both in terms of its analysis and the policies it advocates. Drawing upon the money view literature (Mehrling 2011, 2012, 2014), we argue that disciplinary central banking along the lines advocated by Nyborg would be destabilising, economically as well as politically. In fact, the proposed modality of central banking is the opposite of what is needed to foster financial stability in financial systems where money and capital markets are closely intertwined. The very notion of “market discipline” – core to much mainstream thinking on central banking – is predicated on a funding liquidity logic, ill-suited for market liquidity concerns.

The upshot is that the more collateral policies embed the asset valuation practices of financial market participants in central bank crisis interventions, the more destabilising those interventions will be. If central banks are to succeed in preserving market liquidity, two criteria are key: central banks must backstop the market values of core collateral assets, and their collateral policies must be unequivocally non-discriminatory and countercyclical.

Read the paper

Find all related publications
Publications
13/06/2022

Just Transition & Revitalisation – A New EU Strategy for Rural Areas

How can EU actions support the revitalisation of rural areas? How can EU institutions put […]
19/05/2022

European Industrial Policy: A crucial element of strategic autonomy

European Strategic Autonomy series - Economy & Trade
12/05/2022

A macro-development perspective on euro area imbalances

By FEPS and Initiative for Policy Dialogue (IPD), founded by Nobel Laureate Joseph E. Stiglitz.
15/02/2022

Three ideas for a stronger Social Europe in a post- Covid 19 recovery

Policy Study by FEPS Young Academic Network (FEPS YAN) Through its eclectic 20 principles, the […]
Find all related events
Events
Past
30 - 31/05/2022
Berlin (Germany) | Online

Day of Progressive Economic Policy 2022

Hybrid Conference, Berlin (Germany), 30-31 May 2022 We are embarking on the frequently invoked “decade […]
22/04/2022
Palermo (Italy)

Healthy Democracy: Inequalities and the pandemic

22 April 2022, Palermo (Italy) The pandemic and the various public health measures adopted to tackle its […]
10/03/2022
Vienna (Austria)

European Green Deal: Investment needs and financing possibilities

Vienna (Austria), 10 March 2022, 11:00 – 13:15 The “European Green Deal” was adopted by […]
Find all related news
News
30/05/2022

FEPS launches ‘Recovery Watch’, a new research project

The National Recovery and Resilience Plans represent the new framework in which member states will identify their […]
10/05/2022

Call to participants: Training Days for Social Business

Switzerland, September 3rd 2022
28/04/2022

Prof. Stiglitz: NextGenEU was a step forward, but the EU needs more flexibility

The Nobel Laureate in Economics Prof. Joseph E. Stiglitz speak out about EU’s economic governance and fiscal rules […]
19/02/2021

FEPS supports the Statement of the Progressive Alliance: Global solidarity is the key to overcoming COVID-19

FEPS is pleased to join the global progressive family and supports the Statement of the […]
Find all related in the media
In the media

Belgians resigned but not yet panicking as prices continue to rise

06/05/2022

2022: Pathway to reconstruction – EURACTIV

01/02/2022

EU sees strengthened partnership with US vital for global recovery – EURACTIV

26/01/2022

A Europa sob teste de alta voltagem – PUBLICO

17/01/2022