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The independence of the central bank at risk

The independence of the central bank at risk

The authors of the blog are worried that the recent judgement of the German Federal Constitutional Court on the ECB’s monetary policy undermines the constitutional basis of the independence of the central bank and its own price stability mandate.

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The ruling of the German Federal Constitutional Court (GFCC) of May 5 on the ECB’s monetary policy affects not merely the relation of Germany to the ECB and the Court of Justice of europe (ECJ) but also the constitutional foundations of monetary policy. The court departs from the German tradition of entrusting monetary policy to an unbiased central bank that’s only given the duty of pursuing price stability. Based on the court’s reasoning, a lot of what the German Bundesbank i did so wouldn’t normally be permissible beneath the German Basic Law.

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Market-based bank capital regulation

Market-based bank capital regulation

Easy solutions won’t work

Simply doubling or trebling capital requirements won’t do. For instance, in 2008-11 the united states Federal Deposit Insurance Corporation (FDIC) lost money on 413 bank failures. Say that those banks – which required 6% core tier 1 regulatory equity to be classified as ‘well capitalized’ – each held a supplementary 14% of assets in cash, but no extra debt on your day they failed. This infusion could have been insufficient to cover losses in 372 (90%) of the cases. 2 Of course many of these banks were not at all hard; more technical large banks may have better risk management, but also more scope for trouble.

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A framework for central banks and bank supervision

A framework for central banks and bank supervision

A fresh policy framework

Under this framework, monetary policy and the regulation of banks aim at stabilizing both inflation and the true economy. Stabilisation of the true economy consists in stabilising output fluctuations due to macroeconomic shocks and by financial instability. In the latter case, stabilisation of output fluctuations is attained by avoiding or reducing financial instability itself.

The central bank could have two instruments at its disposal:

(a) the short-term interest and