Central banks must sometimes act in counterbalance to excessive budgetary policies to achieve their price stability objective, especially when deficits are unsustainable, argues the deputy governor of the National Bank of Romania, Cosmin Marinescu, in an analysis published on his personal blog.
"Since central banks do not control the supply of goods in the economy, it follows that achieving the objective of ensuring price stability must stem only from the "management" of the quantity of money or the monetary mass in the economy. But this does not only reflect the operations of central banks and the process of monetary creation in which commercial banks participate decisively, but also the budgetary measures of governments", wrote Cosmin Marinescu, in the article "Financial Education: The price of money is not the interest rate".
He notes that public policies that lead to an increase in budget deficits also contribute to the expansion of the money supply in the economy, both through the income of the population and through the financial and credit system. Under these conditions, the "operative" role of central banks is essential, to moderate monetary expansion and absorb liquidity from the market.
"To achieve the key objectives of price stability, central banks must sometimes act in counterbalance to excessive budgetary policies, especially when deficits are unsustainable. If this does not happen, the consequence is the persistence of high inflation, in which case central banks end up missing the stability objectives regarding the value of the national currency. Therefore, the independence of central banks is an indispensable condition to benefit in the long term from sound monetary policies and stable currencies. In this sense, the financial education of the public and the economic environment represents an essential ingredient for the quality of public policies and the sustainable development of the country," stated Cosmin Marinescu.
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