Governor of the Bank of Greece, Yannis Stournaras, discusses evolution of central bank mandate:
Heraclitus, the Greek philosopher, famously asserted “everything changes, and nothing stays”. This observation is valid across all aspects of life, and central banking is no exception.
It was not that long ago when monetary policy was thought to be a policy instrument with limited influence, even by central bankers.
One notable central banker who held that view was Arthur Burns, who was Federal Reserve Chairman in the 1970s. And so, when inflation started rising in the United States following the first oil price shock in the early 1970s, Burns kept his foot on the monetary-policy gas pedal. U.S. President Nixon was facing re-election and Burns did not want to jeopardize Nixon’s chances by allowing unemployment to rise.
Burns advocated wage-price controls – and not monetary policy – as the best way to prevent inflation.
What followed was the Great Inflation — a combination of double-digit inflation and double-digit unemployment rates.
Not all central banks acted that way. Both the Bundesbank and the Swiss National Bank, to name two notable exceptions, tightened monetary policy in response to the 1970s oil price shocks.
As a result, their economies escaped from the oil price shocks in much better condition, both in terms of inflation and in terms of unemployment, than that of the United States.
That experience taught central banks a lesson: monetary policy needs to focus on inflation if it wants to prevent stagflation – that is, a combination of high inflation and high unemployment.
Today, no central banker would doubt that firm resolve is needed to tame inflation, even if, as in the period following the Covid shock, inflation was mainly supply-driven.
Consequently, the evolution of thinking about what central banks can – and cannot – do has been profound during the past 50 years.
He goes onto discuss the current debates on central bank mandates:
Let me now turn to broader challenges that call for a forward-looking reassessment of central bank roles.
Central banks do not operate in a vacuum. In the euro area, we must navigate a particularly complex environment.
This environment is shaped by fragmented capital markets, persistent geopolitical tensions that impact energy markets and supply chains, the urgency of climate risks, and a pressing need to address the productivity gap vis-à-vis other major economic areas.
Let me be clear: central banks are not the main actors in resolving these challenges. That responsibility lies primarily with governments and legislators in Europe.
However, monetary policy has a vital supporting role: to provide an anchor of stability. By safeguarding our primary objective – maintaining low and predictable inflation – we secure a fundamental condition for sustainable growth. This, in turn, fosters confidence among households and firms, spurring investment and job creation.
Over the past year, as inflation has eased, we have been able to largely remove policy restrictiveness. This easing in financing conditions will make capital more affordable and accessible, which is essential for investment in a time of very high uncertainty.
The ECB has also been a frontrunner in contributing to some of these broader agendas. Within our mandate, we are actively integrating climate-related considerations into our operations, risk assessments, and supervisory and collateral frameworks. In our strategy assessment, climate remains a policy priority within our remit.
Yet, there is something that cannot change: monetary policy cannot drive Europe’s transformation alone.
That’s why we are pressing for progress in other areas, notably financial architecture. Such progress can support the effectiveness of our monetary policy, a point made clear also in our 2025 strategy assessment.
To mobilize investment at the scale needed to re-invigorate growth and ensure that the benefits flow seamlessly across borders, we need to finalise the Banking Union and deepen the Capital Markets Union.
A fully fledged “Savings and Investments Union” is essential. It will fundamentally improve how our financial system channels savings into productive investment, especially in critical areas like energy, defence, and innovation – all pressing priorities for our Union.
