If domestic policy-makers and other economic actors delay necessary reforms because they can count on the central bank to provide support whenever market conditions deteriorate, monetary policy may become insufficiently effective, as well as biased towards the short term.
In the words of Hervé Hannoun, the Deputy General Manager of the Bank for International Settlements, a central bank has to constantly guard not only against the risk of “fiscal dominance” but also “financial dominance”. I would like to give one example. A central bank can commit itself to engaging in extraordinary monetary policy interventions and to swiftly reversing them as conditions improve.