Professor Lucrezia Reichlin
Doha: A panel of experts discussed challenges faced by central banks and shed light on new directions in central bank research and policymaking during the inaugural conference of the Qatar Centre for Global Banking and Finance at King’s Business School, London.
Governor of Qatar Central Bank (QCB), H E Sheikh Abdulla bin Saoud Al Thani, delivered the opening remarks during the virtual conference ‘Challenges facing Central Banks in the 2020s’.
The discussion focused on Central bank mandates, policy frameworks and governance arrangements, understanding the interaction of fiscal, monetary and macroprudential policies, understanding new and emerging threats to economic stability, including COVID, climate change and new financial technologies, conducting monetary and macroprudential policies in times of uncertainty, data analytics for central banking.
Professor Lucrezia Reichlin (pictured), London Business School and Director General of Research at the European Central Bank 2005 - 2008 talked about The Future of Monetary Policy: Lessons from the European Monetary Union’. She discussed about the changes to the size and composition of the balance sheet of the central banks and the policies associated with it and implications it has for the institutional design of central banking in general and particularly in the European Economic and Monetary Union.
She said, “Central banks balance sheets have grown since the financial crisis of 2008, reflecting a greater role the central banks have had in financial intermediation. The composition of central banks balance sheet shows not only the size but also the composition of the asset has changed overtime diffracting different criteria in asset purchases and lending. For example, the first jump was in 2008 after the failure of Lehman Brothers, then the European debt crisis with the security market program. In end of 2014 new policies were implemented by European Central Bank (ECB) due to a decline in inflation expectations and then the jump in 2020 due to the pandemic.”
“Historically there are analogies with prerequisites, in relation to financial crisis, currency crisis which leads to the question, what is the rationale for central banks for balance sheet policies. There are two rationales for the measures that the central banks have implemented which are reflected in the increase in the size of their balance sheet. Firstly, the central banks intermediation substitutes for private market activity when financial market size up. The second rationale is lowering the level of short-term interest rates, alternatives measures are needed to ease financial conditions facing the private sector,” she added. She also discussed the differences and similarities between these two for the balance sheet policies.
Professor Lucrezia said, the first rationale emphasizes the complementarity between standard measures and the conventional monetary policy. The traditional Quantitative Easing (QE) is a proactive reactive approach to address the macro implementation of financial tensions typically affecting the long end of the curve or reducing returns on safe asset pushing investors along the risk and maturity spectrum. The examples of these policies are evident in the UK but also there are asset purchase programs implemented in ECB in 2015 and some new programs have also had that kind of rationale.
She also highlighted managing liquidity tensions, solvency problems, improving institutions, and building governance, and monetary fiscal infraction.
