Are Rules and Boundaries Sufficient to Limit Harmful Central Bank Discretion? Lessons from Europe

10 Pages Posted: 27 Aug 2014

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Date Written: August 26, 2014

Abstract

Marvin Goodfriend’s (2014) insightful, informative and provocative work explains concisely and convincingly why the Fed needs rules and boundaries. This paper reviews the broader institutional design problem regarding the effectiveness of the central bank in practice and confirms the need for rules and boundaries. The framework proposed for improving the Fed incorporates key elements that have already been adopted in the European Union. The case of ELA provision by the ECB and the Central Bank of Cyprus to Marfin-Laiki Bank during the crisis, however, suggests that the existence of rules and boundaries may not be enough to limit harmful discretion. During a crisis, novel interpretations of the legal authority of the central bank may be introduced to create a grey area that might be exploited to justify harmful discretionary decisions even in the presence of rules and boundaries. This raises the question how to ensure that rules and boundaries are respected in practice.

Keywords: Rules, discretion, central bank mandates, ECB, Central Bank of Cyprus, ELA

JEL Classification: E58, E61

Suggested Citation

Orphanides, Athanasios, Are Rules and Boundaries Sufficient to Limit Harmful Central Bank Discretion? Lessons from Europe (August 26, 2014). MIT Sloan Research Paper No. 5114-14, Available at SSRN: https://ssrn.com/abstract=2487250 or http://dx.doi.org/10.2139/ssrn.2487250

Athanasios Orphanides (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

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