Challenges for Central Banks In the Context of the Crisis Dr. D. Subbarao Governor Reserve Bank of India RBI’s International Research Conference Mumbai February 12, 2010

2 Task for Central Banks Distil lessons of crisis and institute reforms This involves change in what central banks do and how they do it.

3 Address five challenges for central banks

4 First Challenge Global crisis requires global response Global factors will impact on central bank policy decisions Extent of challenge depends on the breadth of central bank’s mandate Managing Monetary Policy in a Globalizing Environment

5 Second Challenge (i) Should central banks persist with inflation targeting? (ii)What is the role of the central banks in preventing asset price bubbles? (iii) Should central banks also be doing regulation and supervision of banks? Redefining the Mandate of Central Banks

6 Should central banks persist with inflation targeting? Inflation targeting seemed successful resulting in Great Moderation Post-crisis, consensus on inflation targeting diluted, if not dissolved

7 What is the role of central banks in preventing asset price bubbles? Greenspan orthodoxy on asset bubbles Crisis has dented the credibility of Greenspan orthodoxy Monetary or regulatory action to prevent asset price bubbles?

8 Should central banks also be doing bank regulation and supervision? Variety of regulatory models around the world Arguments in support of central banks doing bank regulation and supervision Arguments against

9 Third Challenge How does one define financial stability? Should central bank mandate include financial stability? Should financial stability be an exclusive or shared responsibility? Do central banks have the necessary instruments? Does responsibility for financial stability encroach on the independence of central banks? Responsibility of Central Banks Towards Financial Stability

10 Post-crisis agenda dominated by regulatory reforms Regulation has costs Balancing costs and benefits of regulation is the challenge Fourth Challenge Managing the Costs and Benefits of Regulation

11 Fifth Challenge To start with, fiscal dominance of monetary policy During 1980s fiscal dominance yielded to independent inflation targeting central banks Financial stability mandate – does it erode central bank independence? Transparent, responsive, accountable behaviour on the part of central banks Managing the Balance Between Autonomy and Accountability of Central Banks

12 Conclusion Managing monetary policy in a globalising environment Redefining the mandate of central banks Responsibility of central banks towards financial stability Managing the costs and benefits of regulation Managing the balance between autonomy and accountability of central banks Five Challenges

13 By Far the Biggest Challenge for the Central Banks To regain credibility