The Future of Central Banking
Author : Charles A. E. Goodhart(Professor, London School of Economics)
A Central Bank will normally be primarily concerned with three main, and interconnected, aspects of stability. These are domestic price stability, external stability of the value of the currency, and overall systemic stability in the financial system.
With only one main instrument, the short term interest rate, a CB can focus primarily on either domestic price stability or external stability of the value of the currency, but not on both simultaneously. We ask whether there may be secondary instruments to help achieve external stability of the value of the currency and overall systemic stability in the financial system.
We conclude that there is now a consensus on how to maintain domestic price stability. But there is less understanding of the determinants of exchange rate volatility, which remains undesirably high. Several of the historical operations of the CB in managing the financial system remain firmly maintained and well-functioning, but there are continuing organisational problems in arranging and co-ordinating responsibilities for financial supervision and crisis management.