As I have tried to explain, central banks have to face several constraints, most of which - I have to say - are often forgotten by analysts, commentators and academics. Effective communication is essential because it enables the central bank to guide agents’ behaviour and expectations, thereby keeping its policy line consistent with its objective and its assessment of economic conditions.
The current regulatory framework promotes a nexus between bank and sovereigns because it encourages banks to invest in sovereign debt. This reinforces the “doom loop”, as Yves Mersch of the European Central Bank called it, between the sovereign sector and the banking system. Should doubts about the sustainability of government debt arise, the national banking sector will also be negatively affected.