Should central banks mandate be revised?

Two years ago, at the Les Rencontres Économiques d’Aix-en-Provence, I began by asserting that “crises are multidimensional” and that “viewing monetary policy as the Holy Grail of economic policies is as elusive as the Holy Grail itself.” While I didn’t need hindsight to confirm this — it is, after all, Economics 101 — I couldn’t have anticipated the complexity the world would face, impacting monetary policy. Today, we live in a fragmented world marked by wars, trade threats, urgent climate transitions, and the rise of artificial intelligence. These multifaceted challenges create macroeconomic imbalances, pressuring activity and prices.

Monetary policy remains under scrutiny and is often pressured to address objectives beyond its mandate. However, as a macroeconomic tool, it is inefficient at resolving microeconomic frictions. This inefficiency is among the strongest arguments for central bank independence. Economic systems possess more effective tools to achieve micro-objectives.

Yet, efficiency alone is insufficient to preserve the legal independence that central banks have secured over recent decades. Independence must be maintained by fulfilling central banks’ primary roles. Economic history shows that independence is necessary for conducting monetary policy, but it is not sufficient. Monetary policy actions must align with core objectives to build credibility and preserve independence. Independence is not isolation.

In an increasingly volatile and interconnected world, central banks must fulfill their mandates while maintaining a general equilibrium perspective. Prices, wages, and expectations are endogenous to the economy. Whether a central bank has a single mandate — price stability —or a dual one — price stability and full employment — the operational difference is minimal in practice. Ultimately, central banks aim to influence the economy through the price of money, either directly or indirectly. 

Economic theory demonstrates that supply shocks fall outside the realm of monetary policy. Yet, the impact of supply-side shocks on prices is often non-negligible. Recent years provide numerous examples: pandemic-induced supply chain disruptions, energy shocks from the unjustified Russian war against Ukraine, and trade disturbances due to protectionism.

Because monetary policy acts through aggregate demand, they require a more agile, flexible, and precise approach. Targeting inflation allowing for small enough symmetric deviations, may give central banks more room to accommodate temporary price fluctuations caused by exogenous supply shocks. However, this flexibility comes with a trade-off: the risk of deanchoring inflation expectations, either upwards or downwards.

Monetary policy cannot act alone. Fiscal authorities, regulators, and private sector actors must align, cooperate, and share risks. In an uncoordinated world, overburdening central banks with this responsibility necessitates more aggressive monetary policy, with notable negative consequences for economic activity and reducing the space for monetary policy reaction.

The policies adopted by the ECB have successfully anchored inflation expectations and brought inflation to its 2% target. This credibility is vital for consolidating and enhancing the international role of the euro, even if it is a long-term project. To promote the role of the euro, Europe must continue improving its financial architecture. Europe still lacks a fully integrated financial sector. Promoting a robust capital market and completing the Banking Union are essential for channeling European savings into investments within Europe and developing a more competitive financial system. Furthermore, a central fiscal capacity based on common debt would provide a safe asset for international investors and ease financial constraints. Europe’s integration depends on mutual trust, which Europeans have demonstrated on multiple occasions.

Europe should nurture its leading global role in macroeconomic stability and credibility, a key ingredient for reserve currency status. On this front, Europe is performing well in absolute and relative terms, and policy makers must continue to deliver. The recent assessment of the ECB’s monetary policy strategy provides a firm commitment on delivering better policy.