Could central banks have prevented the recession?

The role of central banks is changing, says Lawrence Schembri, a deputy governor of the Bank of Canada.

In a recent speech, Schembri explains the original role of central banks was to help maintain financial stability economies, primarily during times of economic stress. He says, “Central banks have served as lenders of last resort, providing liquidity to prevent stress from sparking contagion in solvent but illiquid financial institutions.”

But now, “the severity of the economic fallout” of the recession has prompted questions about whether central banks can and should play a bigger role. Schembri wonders whether these banks “could have done more to prevent [the recession], rather than just trying to mitigate its economic impact” afterwards.

Read: Monetary policy “not the only game in town”: BoC brass

He proposes central banks need to:

recognize the role and limits of monetary policy;
focus on crisis prevention through means other than monetary policy, while also rethinking their roles as liquidity providers; and
enhance their responsibilities by using their financial-system-wide perspective and analytical capacities more effectively.

Check out his full speech for more on central banks can go beyond monetary policy.

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