Central Banking: Theory and Practice in Sustaining Monetary and Financial Stability

Chapter 4A Brief Review of Modern Central Banking MandatesWhat Are the Goals That Modern Central Banks Try to Achieve?

Learning Objectives

1. Identify and distinguish different mandates of modern central banks.
2. Describe the monetary stability mandate.
3. Describe the financial stability mandate.
4. Describe the full employment mandate.
5. Explain the interlinkages among monetary, financial stability, and employment mandates in the short and long run.

In Chapter 3 we reviewed the five key functions of the modern central bank: money creation, the conduct of monetary policy, payment systems oversight and provision, lender of last resort, and banking supervision. We examined how these functions fit into two key roles of modern central banks, that is, the safeguarding of monetary stability and the safeguarding of financial stability.

In Chapter 4 we will look at the key roles, or mandates, of modern central banks in more detail. First, we will look at monetary stability and financial stability, the two key mandates common to many modern central banks. Then, we will also look at the full employment mandate of the U.S. central bank, which has regained much attention after the recent global crisis.

4.1 AN OVERVIEW OF MODERN CENTRAL BANKING MANDATES

Before going into detail on each of the mandates, however, there are two things to note about them. First, central banks’ roles or mandates do evolve following changes in the economic, political, and ideological environment. Since these roles evolve ...