Markets, Productivity, and Happiness in a Historical Perspective

The Resilient Economy or Why a Central Bank's Role in the Society should be Discussed (again)

Muchlinski Elke, Berlin School of Economics and Law

Keynes wanted the Bank of England (BoE) to be regarded as a rational element, just like energy or electricity which is needed for successful activity and mindful of practical purposes, rather than to being seen as an enemy of society. At the time the BoE lacked explanatory power which itself restricted its effectiveness in steering market expectations. He also justified this aspect in his criticism of the gold standard as a 'golden fetter' for any potential room for manoeuvre of a central bank; “The system was becoming precarious by reason of its artificiality” (Keynes 1923, C.W. Vol. IV., p. 137). The BoE should act as an institution aimed at greater responsibility to undertake research in certain fields, e.g., British industry, finance and foreign trade. The BoE should also exercise a role as a market participant: “By ‘investments’ I mean any asset, other than gold, which the central bank purchases on its own initiative; thus it may include bills purchases in the open market. By advances I mean any asset, other than gold, which the central bank has purchased in virtue of an obligation, of law or custom, to purchase such an asset if it is tendered on specific conditions. By the ‘bank rate’ I mean the term on which the central bank is bound or is accustomed to make such advances. Fn: A bank may have several slightly varying rates corresponding to varieties of ‘eligible’ assets” (Keynes 1930, C.W., Vol. VI, p. 202.) The tasks of central banks (CBs)have changed greatly since the 1930s. In the course of overcoming the financial crisis of 2008-2009, scientific articles discuss again the relationship between independent CBs and governments, in particular their ability to coope-rate successful in times of crisis. „During and after the financial crisis, there has certainly been a great deal of cooperation between many central banks and their corresponding treasuries or finance ministries. (Hereafter, ‘treasuries’) Did that cooperation go too far, so that it threatened or threatens central bank independence?“ (Blinder, Alan, 2013, p. 1, Financial Crises and Central Bank Independence. Business Economics. Vol. 48, No 3, 163-165). Current events motivate us to re-study the Keynesian position. Using the modified Bagehot rule, CBs can change the resilience pattern of markets and thus influence agent expectations. Only CBs manage to cushion endogenous risks using innovative methods to lower the price of risks and thus ensure an effective backstop (e.g. March 2020, Summer 2020). In this way, they can strengthen the financial markets by creating the basis for the resilience of the economy. PD Dr. Elke Muchlinski,, Berlin School of Economics and Law


Keywords: Central banking, mmandate, asset prices, steering market expectations

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