International cooperation and central banks.

Pocatilov Anastasia, 2EM2

WEF 2014
The consequences of the financial crisis, the origins of which lie in global imbalances and whose transmission mechanisms are cross-national, seems prima facie to demand more strong and institutionalized cooperation. However, in the five years visions of what central banks can and should do have changed profoundly. In particular, the demand that they should play a much more intense and privileged role in financial supervision has had made them more nationally focused and in consequence less able to cooperate.

RULES
Successful central banks have in consequence usually defined themselves primarily in terms of following a rule. The two most important rules were:

The 19th-century gold standard, which imposed a convertibility requirement;

The late-20th-century introduction of a rule on monetary growth

Taylor Rule
This lesson has been powerfully reinforced by the economics literature on time-inconsistency which demonstrates strikingly how policy can be better (because more credible) when discretion is taken away from policymakers. More recently, after the faltering of monetary rules (because of difficulties in defining the right monetary aggregates), attention shifted to interest-rate rules the most prominent example being the Taylor rule, in which interest rates are set on the basis of a measure of inflation and an output gap.

Brotherhood
of central banks.

Cooperation often depends on this art of central banking, practiced by a brotherhood of central banks. Modern central bankers, recognizing the limits of personalized politics, will often attempt to formulate rules. However, rules and hence institutionalisation are especially problematic in the case of central banks with conflicted policy goals. An inability to follow clear rules leads to a backlash against both the personalities and the cooperative strategies in which they are engaged, as soon as things appear to go wrong as they almost inevitably will do.

Conclusion
Crises increase the demand for central-bank cooperation in order to provide a global public good financial stability. But they also dramatically increase its cost, and in particular the fiscal costs associated with interventions to ensure financial stability. This means that crises are very often associated with setbacks to the cooperative process, and disenchantment or disillusion about the role of central banks.