Abstract and Keywords
Central banks have a mandate—either explicit or implicit—to guard against systemic financial crises and manage them if and when they occur. Given the need to make urgent decisions in the face of rapidly evolving circumstances, the central bank in a crisis faces challenges of economic analysis, market judgment, and political legitimacy. Lacking a simple criterion such as the rate of inflation, crisis-management decisions are inevitably contested in terms of both technical success and democratic legitimacy. Focusing on the mandates and the toolkit of central banks, this chapter illustrates how shortcomings can arise in responding to macrofinancial crises and then highlights directions for improvement. A selection of case studies identifies how political economy dynamics had an impact on historic episodes, for better or worse.
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