Author(s): Athanasios Orphanides, Central Bank of Cyprus
Date published: May 2011
Athanasios Orphanides, Governor of the Central Bank of Cyprus, delivered the 2011 SUERF Marjolin Lecture. The title of the lecture was: “New paradigms in central banking”. The Governor started by saying that the business of central banks is to ensure price stability, financial stability and economic stability. This has been the case for 200 years, but the understanding of the elements and the focus has changed. The Federal Reserve System was founded in 1913 to overcome a financial crisis (to ensure financial stability). After 1945, maintaining economic stability was the main task. There were several lessons to draw from the most recent crisis. The importance of central bank independence and credibility has been underlined. The massive increases in liquidity in the autumn of 2008 could have caused increased inflation expectations but this did not happen due to the credibility of central banks. There seems to be a broad consensus about a forward looking orientation in monetary policy strategy. There is, however, a debate on how to pursue a systematic policy. How ambitious should monetary policy be? Do central banks know enough? Output gap estimates are often misleading. This illustrates why central banks should not rely on an activist approach. The term “unconventional monetary policy” has been used often recently. The ECB has phased out some unconventional measures. The problem is, however, that the understanding of “unconventional” changes through time. There is a recognised need to strengthen macroprudential supervision, but can greater central bank involvement in regulation and supervision pertaining to credit and finance contribute to better management of overall economic stability? Not unless central banks have the appropriate tools.
Any way, regulation and supervision should be closer to the central banks. Sound fiscal policy is a prerequisite for economic stability. In several European states governments tolerated structural deficits and public debt levels that posed risks when the crisis hit. Inadequate adherence to sound longterm fiscal planning has left a limited fiscal space. The Stability and Growth Pact should have encouraged a sound fiscal policy, but it did not work. Doubts about some governments’ ability to fulfil their debt obligations have led to the crisis. Ten year yields on government bonds – all denominated in euro – show how financial markets evaluate the sovereign risks. A strengthening of economic governance in the euro area must in the future prevent irresponsible fiscal behaviour and make it difficult to postpone necessary fiscal consolidation when it is needed. Today, lack of clarity about euro area governance and crisis resolution has an adverse impact on the euro area.