Are rules and boundaries sufficient to limit harmful central bank discretion? Lessons from Europe

  • Marvin Goodfriend’s (2014) insightful, informative and provocative work explains concisely and convincingly why the Fed needs rules and boundaries. This paper reviews the broader institutional design problem regarding the effectiveness of the central bank in practice and confirms the need for rules and boundaries. The framework proposed for improving the Fed incorporates key elements that have already been adopted in the European Union. The case of ELA provision by the ECB and the Central Bank of Cyprus to Marfin-Laiki Bank during the crisis, however, suggests that the existence of rules and boundaries may not be enough to limit harmful discretion. During a crisis, novel interpretations of the legal authority of the central bank may be introduced to create a grey area that might be exploited to justify harmful discretionary decisions even in the presence of rules and boundaries. This raises the question how to ensure that rules and boundaries are respected in practice

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Author:Athanasios OrphanidesORCiDGND
Parent Title (English):Working paper series / Institute for Monetary and Financial Stability ; 84
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (84)
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2014
Year of first Publication:2014
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2014/12/16
Tag:Central Bank of Cyprus; ECB; ELA; central bank mandates; discretion; rules
Issue:October 2014
Page Number:13
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht