Central banks today could not make it any clearer: their sole legitimate purpose is to serve the public interest. Janet L. Yellen, chair of the US Federal Reserve until February 2018, states that ‘[i]n every phase of our work and decisionmaking, we consider the well-being of the American people and the prosperity of our nation’.¹ Mark Carney, Governor of the Bank of England, refers back to the 1694 Charter for the ‘timeless mission’ of his institution: ‘its original purpose was to “promote the publick Good and Benefit of our People. . .”’.²

In the same 2014 speech, Carney emphasises that what it means to serve the people has shifted over time: ‘In 1694 promoting the good of the people meant financing a war with France.’³ In light of the events since the onset of the financial crisis in 2007, it appears that what serving the people entails is shifting yet again. Indeed, over the last ten years, central banks have moved into previously uncharted territory with policy measures such as quantitative easing (QE). These measures have inflated the balance sheets of major central banks – by five times for the Federal Reserve and the European Central Bank, and by more than ten times for the Bank of England – and radically changed the role they play in our economies. Christian Noyer, then governor of the Banque de France, acknowledged in 2014 that central banks became ‘the only game in town’⁴ as they took on more and more responsibilities to stabilise volatile and risky financial systems.

In this shifting landscape, can we be confident that what central banks do, and what they are asked to do, best serve the people? In particular, do central banks sufficiently take into account the side effects of their unconventional measures? Do they do enough to avoid another financial crisis? Should we trust central bankers when they intervene as experts in public debates? These are the questions at the heart of this book.

Situated at the interface between governments and financial markets, central banks are one cog in a complex institutional machinery, which has been built over the years to regulate the economy and promote the public interest. The functions given to this cog and its interactions with various other parts of the machinery have changed significantly over time. The current thinking about how central banks should serve the people mostly conforms to a template that spread like wildfire throughout the world in the 1990s. This template prescribes that the central bank should have narrow regulatory goals – archetypally limited to price stability – and that it should not coordinate with other parts of the machinery, especially not with the legislative and executive branches of the State.

This book is built on the premise that an in-depth evaluation of the role of central banks in society should not take this template as given. The increased importance of monetary policy in the macroeconomic toolkit since 2007 confers additional importance to this project. Our main contribution lies in defending the claim that, on three matters, central banks today do not seem to best serve the people in their monetary zone. In Chapter 2, we maintain that the inegalitarian effects of monetary policy since the 2007 crisis are worrisome, and that the arguments for disregarding them when formulating monetary policy are dubious. In Chapter 3, we argue that the current institutional configuration is favouring the interests of the financial sector at the expense of the broader public interest. In Chapter 4, we diagnose a conflict of interest inside central banks between two types of expertise they produce, which undermines the trust we can have in the information they provide on some topics. With these three concerns in mind, the concluding chapter indicates an array of policy alternatives that could make central banks better servants of the public.

Two conditions must be in place to productively discuss how central banks can best serve the people in the future. First, participants in the discussion must understand how central banking works. The next chapter aims to supply the essential elements of such an understanding to non-specialist readers. Second, participants must be ready to seriously entertain the possibility that the current institutional configuration is not optimal. This condition does not seem to be met today among the specialists on central banking, that is, professional economists. Ninety-four per cent of economists who participated in a recent survey agreed that ‘it is desirable to maintain central bank independence in the future’ – ‘central bank independence’ being the phrase used among specialists to describe how the central bank as a cog currently relates to other parts of the institutional machinery.⁵ This book argues that this conventional wisdom needs to be revisited in light of the recent dramatic changes both in how the financial side of a modern economy works and concerning the policy instruments employed by central banks.