It is time to look deeper into the framework of central bank independence, Swedish Minister for Finance Magdalena Andersson said.
In an interview on Thursday in Stockholm, she said that more research and discussion are needed on how central banks and governments can coordinate policy responses in a crisis situation.
“Looking back on the wave of reforms that made central banks independent, it’s obvious today that it wasn’t well thought through,” she said. “There might be situations when fiscal and monetary policy need to work together in a way that’s not possible under the present regulation.”
Central bank independence is increasingly being questioned in the aftermath of the financial crisis, which triggered an unprecedented amount of global stimulus involving negative rates and large scale bond-buying.
The size and length of the response was in part due to governments also cutting back on spending in the face of depleted coffers.
Celebrating its 350th birthday, Sveriges Riksbank, the Swedish central bank, gained independence in the early 1990s.
It has cut rates well below zero and bought up about half of the country’s bond market. Policymakers have also forced the Swedish krona lower over the past few years, but on Friday found themselves at odds with the Swedish National Debt Office as it positioned itself for a stronger exchange rate.
Lawmakers from all political parties in Sweden are now discussing whether fiscal policy should be used more actively when the next downturn comes, amid concerns that the Riksbank’s toolbox will be, if not empty, then less prepared to tackle hard times.
Key officials at the European Central Bank have also called on European leaders to create a fiscal stabilization fund to help the region ride out times of stress.
The past two decades of central bank independence will probably be remembered fondly by monetary policymakers, London School of Economics professor Charles Goodhart said, adding that as the population ages, interest rates will likely rise, bringing central bankers and government officials more into conflict.
“Quite a lot of central banks that currently have independence will probably lose it to more populist politicians,” he said at a panel debate in Stockholm on Friday. “And the rest will have more difficulty maintaining the independence they’ve had in the past 20 years.”
While the independence of central banks in the western world has a firm footing in economic research, Andersson said that the coordination of fiscal and monetary policy is something that research “didn’t really highlight.”
Sweden, for example, already has a stability council comprised of the Riksbank, the Swedish Financial Supervisory Authority and the debt office, which could serve as a forum, Andersson said.
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