Part One

INTERVIEWER Gabriel Mangano, you're an expert on central banking. Could you briefly summarize the functions of a central bank?

GABRIEL MANGANO Yes. I would say there are four of them. The first one is actually to implement monetary policy. There are roughly three ways to do it. First setting interest rate ceilings and floors, which means limiting, upwards or downwards, the fluctuations of the interest rate. The second way to implement monetary policy is simply printing money, or destroying it - coins, banknotes. The third one, which is a bit more modern, is those open-market operations, which are simply buying and selling government bonds to and from commercial banks.

So that was the first main task of a central bank. The second one is exchange rate supervision, I would say. Mainly for floating exchange rates but one should not forget that even for a fixed exchange rate the central bank still has to make sure that it has enough reserves to counteract any upswing or downswing of this exchange rate.

Third main task, yes, commercial banking supervision I would say – make sure that the commercial banks have enough liquidities, for instance, to avoid any bank run. INTERVIEWER What's a bank run? GABRIEL MANGANO The bank run is a sort of, a kind of panic, a situation in which investors or simply customers of the banks run to the bank and take their money out because they realize or they think they realize that their bank is not trustworthy any more. And to avoid this actually, the central bank has to make sure that they have a sufficient liquidity ratio, for instance.

Fourth main task of the central bank would be to act as a lender of last resort in case, actually, one of these commercial banks goes bankrupt and the investors, the people putting money in the bank, have to get back their

Part Two

INTERVIEWER And I know that you believe that central banks should normally be independent from the government, rather than a government department. Why is this?

GABRIEL MANGANO Well, the main reason is what we call, in economics, the political business cycle. If the central bank mainly acts as a branch of government, then this government is inclined — incited — to increase abruptly, for instance, money supply just before elections in order to favour employment, but, of course, this has a negative effect on inflation, but as the government is not sure to be re-elected, at least it has some positive impact on employment just before the election, which is positive. There are also other reasons, which are more technical probably, but the main other one I would quote is the fact that it's more efficient for a separate body to implement monetary policy while the government is really only restrained to implementing what we call budgetary policy, which means having a larger or smaller budget deficit.

INTERVIEWER And this happens in America, in Germany?

GABRIEL MANGANO Mainly in Germany. The two most independent central banks we can think of are really Switzerland and Germany.

INTERVIEWER Not the Fed, the Federal Reserve?

GABRIEL MANGANO The Fed, yes, but the Fed is slightly less independent, in the sense that, for instance, it doesn't have a goal of price stability as clearly stated as the German or the Swiss central banks, for instance.

INTERVIEWER And examples of central banks which are influenced by the government?

GABRIEL MANGANO Well, there's Britain, for instance. France is being slowly privatised -well, made independent. Italy, contrary to what most people think, is a qu"e independent central bank, it's one of the most efficient public bodies, I would say-

INTERVIEWER But you think the independent bank is a model for the future?

GABRIEL MANGANO Yes, I would argue it is not, it should not be completely independent. Actually I'm working presently on something that tends to show that the independence should actually be adapted to the economic conditions in the country and outside the country, but yes, generally a more independent central bank is certainly more, well certainly more desirable than a non-independent central bank.

Unit 12. Taxation