A Safe Core Mandate for Central Banks
with Enrico Perotti, University of Amsterdam, ESRB and CEPR
Discussant: Arvind Krishnamurthy, Stanford University, NBER and CEPR
Moderator: Loriana Pelizzon, Leibniz Institute SAFE and CEPR
Central banks have vastly expanded their footprint on capital markets. At a time of extraordinary pressure by many sides, some benchmark for the scale and scope of their core mandate of price and financial stability may be useful. We make a case for a narrow mandate to maintain and safeguard the border between safe and quasi safe assets. The central bank should not be burdened by ex-ante mandates to intervene outside the safe core, unless directed to specific goals set by legislation with explicit fiscal support.
A safe core formulation is very close to current practice, but the framing offers some context on controversial issues. It justifies a persistently large scale for central bank liabilities (Greenwood, Hansom and Stein 2016), as safety demand is related to financial wealth rather than GDP. It is consistent with an active central bank role in supporting liquidity in government debt markets trading and clearing (Duffie 2020, 2021). We discuss issues related to the definition and protection of the safety border, and discuss the issue of liquidity support for border-safe assets such as MMF or uninsured deposits.