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
14/05/2024

Tightening welfare belts again?

FEPS YAN Series
13/05/2024

Toward a progressive geopolitical EU

FEPS YAN Series
13/05/2024

How can RepowerEU consolidate recovery?

Recovery Watch series
28/02/2024

Progressive ideas to make international trade successful for all

Find all related Progressive Post
Progressive Post
08/05/2024

Strengthening territorial cohesion and  the single market

08/05/2024

A good jobs compass for the internal market: creating its human face for the mid-21st century

08/05/2024

On the dangers of promoting scale in the name of competitiveness

Find all related events
Events
Upcoming
03/07/2024
Brussels, Belgium

The transformative power of economic democracy

Towards democratic practices in public spending, the workplace, urban planning and public services
Past
21/05/2024
Expert meeting, FEPS HQ

Social Europe in the new EU Economic Governance framework

Integrating social investment & social policy actors
01/05/2024
Budapest, Hungary

Taxing the richest in the EU

For a just, social and green transition in Hungary
Find all related news
News
18/01/2024

FEPS President at Euronews talk-show ‘Brussels, my love?’

29/11/2023

Economic Democracy

FEPS launches an initiative on Economic Democracy
09/10/2023

Tax the rich

A European Citizens' Initiative
14/09/2023

Call for tender – Researcher on inflation

This call for tender closed on 03/10/23
Find all related in the media
In the media

Ласло Андор: Европа трябва да създаде нов модел за икономически растеж

by dir.bg 14/03/2024
'Europe must create a new model for economic growth'. Interview by Laszlo Andor, FEPS Secretary General

FEPS President at Euronews talk-show ‘Brussels, my love?’

by Euronews 15/01/2024
Panellists discussed topics including EU fiscal rules reform, German farmer's protests, and the decision of Charles Michel to quit his job early to run for MEP.

“Trade doesn’t work in isolation from good domestic policies” Interview to Arancha González

by Borderlex 19/09/2023
Interview to Arancha González, former Spanish foreign minister, who released together with FEPS the new book entitled 'The Trade Handbook: Making Trade Work for Prosperity, People and Planet'

A szociális unió imperatívusza

by Új Egyenlőség 09/09/2023
'The imperative of Social Union'. Article about FEPS book 'Europe’s Social Integration: Welfare Models and Economic Transformations' by László Andor.