erkki liikanen : economics and economic policy speech by mr erkki liikanen, governor of the bank of finland, helsinki, 10 april 2018. * * * the central bank is an organisation of public servants. public service bodies obtain their essential mandate from elected bodies. within the eurosystem, the central banks and their governing bodies have been given a definite mandate, including independence in monetary policy issues. in recent years, central banks have also been assigned new responsibilities in the field of macroprudential policy. as part of the eurosystem, the bank of finland participates in monetary policy decision - making and implementation. the bank also has a role to play as part of the banking union. how then should the central bank participate in domestic discourse on economics and economic policy formation? the bank of finland ’ s statements relating to domestic economic policy are based on objectives set for the bank and the eurosystem. according to the act on the bank of finland and the eu treaties the primary objective is price stability. without prejudice to this objective, the bank also supports the achievement of other eu economic policy objectives, such as balanced economic growth. the bank of finland participates in economic discourse in finland primarily at those stages of preparation and decision - making that are consistent with the bank ’ s expertise derived from research, international experience, or other publicly justified economic analysis. there are two such stages : first, identification of the problems related to the current state of the economy ; second, assessment of the potential effects of the alternatives for action. at the same time, we should bear in mind that decisions on individual items of public spending or revenue often involve such value judgements as a central bank should refrain from making. in the past decade, there was a lively debate in the united states on whether federal reserve chairman alan greenspan went too far in supporting president george w. bush ’ s tax reforms. at the central bank symposium in jackson hole in wyoming in 2005, professors alan blinder and ricardo reis emphasised that it is highly questionable whether central banks should voice opinions on issues of economic policy outside of the realm of monetary policy. the general opinion of the meeting was that central banks should refrain from making value - based statements, in particular. but it is an entirely different matter if economic policy jeopardises the conditions for price stability or causes disruption on the financial markets. example from recent years : the structural problems of the finnish economy a role that comes naturally to the central bank in domestic economic discourse

this is exactly what happened three years later after the failure of lehman brothers. next autumn will mark the passing of 10 years since that event. the response from many in the audience was very hostile. rajan was seen as a spoiler at the party and an opponent of innovation and progress. his proposals for reform were called ‘ nonstarters ’. at that time, the policy community was not in a mood to change course just because of one conference presentation, even if it was a balanced and well thought - out contribution. it took a major international disaster for the policy community and the majority of academic opinion to adjust its view. rajan ’ s speech was a great example of not only professional competence, but also of professional integrity and even courage. economics and climate change when we examine the major societal issues of our time that also have a strong impact on the economy, we cannot ignore climate change. climate change has been described as the largest global market failure, which is due to the fact 4 / 6 bis central bankers'speeches that a price has not been established for greenhouse gas emissions. the future of our climate is subject to a considerable degree of uncertainty, but in the scientific community there is broad consensus on the basic issues : climate change is a fact, it is accelerating and it is a humaninduced phenomenon. there are many unresolved and difficult issues in the area of climate policy, but in economics there is a fairly broad consensus on the principles for solving the problem. these principles are discussed also by jean tirole in his book ‘ economics for the common good ’. climate policy should be effective and equitable. the system should be constructed so that all countries have an incentive to participate in the combat against climate change. first, i will discuss the issue of effectiveness. climate change is a global problem that requires global solutions. one global price should be established for greenhouse gas emissions because the impact of greenhouse gas emissions on global warming is the same irrespective of where in the world or in which field of production they are created. various country -, region - or industry - specific unilateral solutions may have unwanted effects. for example, if a country introduces a stricter climate policy, it may provide companies an incentive for relocating greenhouse gas - emitting production to countries with a laxer climate policy. due to this phenomenon – known as carbon leakage – global greenhouse gas emissions would not necessarily decrease. on the other hand, as a result of subsidies on renewable