What future for Central Banks? Howard Davies Director The London School of Economics Hong Kong Theatre – LSE Hong Kong Theatre – LSE London - 24 November, 2005

2. No ‘dull Governor’…

3. …No ‘dull Governor’?

4. Functions of Central Banks Country Monetary Policy Bank Supervision Note Issue US UK France Canada [ ECB Germany Italy Japan Small Part Part ]

5. Central Bankers/100,000 inhabitants Source: The Economist, 2005

6. Central Bank ‘Efficiency’ Source: Central Banking Publications, 2005

7. Central Bankers’ Salaries ($’000) A. Fazio? J-C Trichet Mervyn King A. Greenspan A. Weber I. Macfarlane Source: FT, 28/10/2005 (CentralBankNet.com for Fazio’s unconfirmed 2003 salary)

8. Four Trends 1. Inflation targets

9. Four Trends 1. Inflation targets 2. Changes in Financial Supervision

10. Countries with Integrated Regulators Kredittilsynet (Norway - March 1986) Finanstilsynet (Denmark - January 1990) Finansinspektionen (Sweden - July 1991) Financial Supervisory Commission (Korea - April 1998) Financial Services Agency (Japan - July 2000) Fjármálaeftirlitið (FME) (Iceland - June 1998) FSA (UK - December 2001)* BaFin (Germany - May 2002) Finanzmarktaufsicht (Austria - April 2002) Finantsinspektioon (Estonia - May 2001) CBFA (Belgium - August 2002) Agency of Financial Supervision (Kazakhstan - April 2004) * FSA fully integrated in 2001, but has existed since October 1997

11. How the Centres Rank in Terms of their Regulatory Environment Source: Z/Yen, 2005

12. Four Trends 1. Inflation targets 2. Changes in Financial Supervision 3. Financial Stability

13. Bank of England ‘Financial Stability Review’ “The Financial Stability Review aims: to encourage informed debate on financial stability issues, domestically and internationally to survey potential risks to financial stability to analyse ways of promoting and maintaining a stable financial system” Source: Bank of England, 2005

14. Four Trends 1. Inflation targets 2. Changes in Financial Supervision 3. Financial Stability 4. Public Expectations

15. Guiding Principles for Central Banks Price stability provides substantial benefits Fiscal policy should be aligned with monetary policy Time inconsistency is a serious problem to be avoided Monetary policy should be forward looking Accountability is a basic principle of democracy Monetary policy should be concerned about output as well as price fluctuations The most serious economic downturns are associated with financial instability Source: Mishkin, 2000

16. Mishkin’s 7 Criteria For the Role of a Central Bank 1.Price Stability should be the overriding, long run goal of monetary policy 2. An explicit nominal anchor should be adopted

17. Mishkin’s 7 Criteria (2) 1. Price Stability should be the overriding, long run goal of monetary policy 2. An explicit nominal anchor should be adopted 3. A Central Bank should be goal dependent 4. A Central Bank should be instrument independent

18. Mishkin’s 7 Criteria (3) 1. Price Stability should be the overriding, long run goal of monetary policy 2. An explicit nominal anchor should be adopted 3. A Central Bank should be goal dependent 4. A Central Bank should be instrument independent 5. A Central Bank should be accountable

19. Mishkin’s 7 Criteria (4) 1. Price Stability should be the overriding, long run goal of monetary policy 2. An explicit nominal anchor should be adopted 3. A Central Bank should be goal dependent 4. A Central Bank should be instrument independent 5. A Central Bank should be accountable 6. A Central Bank should stress transparency and communication

20. Mishkin’s 7 Criteria (5) 1. Price Stability should be the overriding, long run goal of monetary policy 2. An explicit nominal anchor should be adopted 3. A Central Bank should be goal dependent 4. A Central Bank should be instrument independent 5. A Central Bank should be accountable 6. A Central Bank should stress transparency and communication 7. A Central Bank should also have the goal of financial stability.

21. …No ‘dull Governor’ either

22. Mishkin’s 7 Criteria plus One 8. A Central Bank should not seek responsibilities which require different forms of accountability and political dependence