Tensions between national governments and central banks have been a recurring issue throughout history, as the objectives and responsibilities of these two entities can often clash. In recent years, these tensions have come to the forefront due to the economic policies implemented in response to the 2008 financial crisis and the ongoing COVID-19 pandemic.
The roots of the tensions and the historical context
Central banks, such as the Federal Reserve in the United States and the European Central Bank, are independent organizations tasked with maintaining monetary stability and promoting economic growth. They typically have a mandate to control inflation and stabilize the currency, and to act as a lender of last resort to the banking system. Central banks use a variety of tools to achieve these objectives, including setting interest rates and purchasing government bonds.
National governments, on the other hand, are responsible for implementing fiscal policy, which refers to the government’s management of its revenue and spending. Fiscal policy is used to stabilize the economy and promote growth, and it is often implemented through measures such as tax cuts or increased government spending.
How the tensions affect the economy and the citizens
One of the main sources of tension between national governments and central banks is their differing perspectives on how to best achieve economic growth. Central banks tend to focus on maintaining monetary stability, and may be hesitant to engage in policies that could lead to inflation. National governments, on the other hand, may be more focused on boosting economic growth and may push for policies that could result in inflation.
The last decade has seen these tensions come to the fore as central banks around the world have implemented unprecedented monetary policy measures in response to the 2008 financial crisis and the ongoing COVID-19 pandemic. This included large scale asset purchase and bringing Interest rate to near Zero.
In the wake of the financial crisis, central banks around the world engaged in quantitative easing, a policy of purchasing large amounts of government bonds in an effort to lower long-term interest rates and stimulate economic growth. While this policy did help to stabilize the economy, it also led to some inflation and asset price bubbles.
In addition, as the COVID-19 pandemic has led to widespread economic uncertainty and disruption, central banks have once again been forced to take action by cutting interest rates to near zero and engaging in large-scale asset purchases. These actions have been designed to support the economy and stabilize financial markets, but they have also led to concerns about inflation.
This has led to the governments pushing central banks for more accomodative monetary policies. Many governments are facing the pressure to spend more to support their citizens and the economy, which may lead to inflation.
What can be done to address these tensions and what to expect in the future.
Tensions between national governments and central banks are a recurring issue that stem from their differing perspectives on how best to achieve economic growth. The past decade has seen these tensions come to the forefront as central banks have implemented unprecedented monetary policy measures in response to major economic shocks. While central banks will continue to work towards achieving monetary stability, national governments will need to balance that with their responsibility to support economic growth and citizens.
