The new political economy of central banks: reluctant Atlas?

Abstract

Over the last two decades, central banks have acquired unprecedented powers and have become the linchpins of domestic economies as well as of the global economy. To deal with major economic challenges – ranging from the 2008 Great Financial Crisis and attendant recession, to the pandemic-related demand and supply shocks and then, especially in Europe, the economic and geopolitical turmoil generated by the economic sanctions and redirection of energy and food supplies in response to the war in Ukraine – central banks have acquired more powers, sometimes de jure, more often de facto. Besides their traditional functions as monetary policy authorities and (in some countries) banking supervisors, central banks have taken on various new roles and reaffirmed old ones, such as the need to fight inflation – after many years of deflation risks. These new tasks include: ‘crisis managers’ of first resort, backstopping banks and states; ‘recession fighters’ of second resort as well as in several countries ‘quasi’ fiscal authorities (given the limited fiscal space, or the unwillingness to use it); ‘paladins’ of the green transition (in some countries more than others); ‘sui generis diplomats’ in international financial networks to foster cross-border cooperation; exploring offering digital currencies, and hesitantly becoming ‘geoeconomic actors’ in an increasingly geopoliticised world.

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