Bank of France’s Noyer Assesses Central Bank Actions

Terry Flanagan

Active use of central bank balance sheets raises a number of concerns regarding price stability, bank independence and solvency, according to Bank of France Governor Christian Noyer.

When unconventional monetary policies were initiated, many analysts were worried that the expansion of the monetary base would trigger inflationary pressures and central banks would lose control over price stability, Noyer said in a speech Monday at the Paris Europlace International Financial Forum in New York.

In fact, the reverse happened. “Broad money aggregates have been basically flat in the euro area over the last 18 months, the money multiplier collapsed and inflation has decreased well below our definition of price stability,” Noyer said.

Other issues include the quasi-fiscal implications of central banks’ balance sheets. There is a general perception that expanded balance sheets create a new environment where the relationship between central banks and governments gets more complicated. “The expansion would expose central banks to new risks, increase their vulnerability and compromise their independence,” said Noyer.

There is a huger theoretical literature on central banks’ solvency, he noted. While nearly all analysts agree that a central bank cannot go technically bankrupt as long as it can issue enough currency and reserves to meet its commitments, unlimited issuance of base money would certainly endanger price stability.

“While the existence of a central bank cannot be put in danger by its technical insolvency, its ability to fulfill its mandate might certainly be compromised,” Noyer said. “And so would its independence as the central bank would depend on the government to rebuild its capital.”

The Eurosystem is fully protected against such a contingency through its solid capital base, which has been strengthened through retained profits and recapitalizations.

“Both its independence and ability to fulfill its mandate are guaranteed even in very adverse economic circumstance,” said Noyer. “While it should not lead to complacency and negligence, the existence of such buffers should alleviate any concerns about the potential risks that the expansion of the balance sheet may entail.

Huge central bank balance sheets influence the allocation of resources or effect fiscal transfer, an issue of special sensitivity in the euro area. “Monetary policy is not immune from the complexity of the real world,” Noyer said.

Some unconventional policies may have had unintended distributional consequences by pushing up asset prices, hence benefiting some households with financial wealth. On the other hand, fostering economic recovery and reducing unemployment goes in the direction of helping the most vulnerable part of the population.

“Unconventional monetary policies are necessary but complex,” said Noyer. “As a consequence, it becomes more difficult to avoid unintended spillovers of stabilization policies on the allocation and distribution of resources. This reality should not prevent central banks from acting decisively when there are risks for price stability, but such actions demand rigor and precision in their implementation.”

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