run more credible monetary policy, making it “ easier ” to achieve their goals. a final merit of central bank independence, especially relevant in the current juncture, is the scope it creates for unorthodox measures during crisis periods. in fact, the greater a central bank ’ s independence and credibility in normal times, the greater its flexibility and credibility to engage in unconventional monetary policy during critical times. thus, during crises, an independent central bank has much more flexibility to take actions that might otherwise fuel inflationary fears. this brings me to the essence of this session. much of the current controversy surrounding central bank independence is related with central banks ’ ability to engage in unconventional monetary policy. bis central bankers ’ speeches as many have argued, their large - scale purchases of financial assets and other unorthodox measures have taken central banks into “ unchartered waters ” and explicitly challenged the notion of central bank independence. the unprecedented expansion of central banks ’ balance sheets since the start of the crisis is certainly revealing. it shows that central banks ’ balance sheets are becoming more and more exposed to economic risk and political pressure. eventually, this may result in a substantial amount of negative capital in a central bank ’ s balance sheet. this is undesirable, because it could undermine a central bank ’ s credibility and independence. on the one hand, a government guarantee to cover potential losses would protect a central bank ’ s financial position. but, if the government has to invoke this guarantee, the fiscal dimension of monetary policy becomes very visible, and the previously solid line between fiscal and monetary policy will be blurred. an additional concern for central banks is that unconventional monetary policy increasingly comes with some sense of “ public unease ” about the role central banks play. while the majority of the public doesn ’ t understand the way central banks operate, many consider central banks at the same time as the only player with room for maneuver. the fact that criticism of central banks is creeping more and more into the mainstream debate – whether or not this is justified – implies that the public is looking increasingly critically at central banks. while this may not put central banks ’ independence or room for maneuver immediately at risk, it does signify that central banks may need to step up their efforts on transparency and accountability. this is a topic i will return to later. now i would like to turn to how central banks should operate in this more complex and challenging environment with a particular focus on the ecb. in my view, there

klaas knot : central bank independence and unconventional monetary policy – challenges for the european central bank speech by mr klaas knot, president of the netherlands bank, at the bank of mexico international conference “ central bank independence – progress and challenges ”, mexico city, 15 october 2013. * * * ladies and gentlemen, it ’ s a great pleasure for me to have been invited to speak at this conference of the banco de mexico. especially so as this event marks the 20th anniversary of its autonomy. and i gladly congratulate the banco de mexico on this important milestone. the topic of this conference – central bank independence : progress and challenges – is very well chosen, i would say. for from the dawn of the financial crisis, back in the summer of 2007, the role of central banks and particularly the relationship with governments has been controversial. in light of the theme of this session, my remarks will focus on one of the most independent central banks of the world, the ecb. i do so as the ecb ’ s unconventional actions have also sparked intense debate about its independence. the main question i try to address is how the ecb should respond to today ’ s complex and challenging environment in which its independence could be at risk. i would like to start off my remarks by reminding people the long - standing wisdom that it is imperative to protect central bank independence. already in the early 19th century, the economic theorist david ricardo explained why it wasn ’ t a good idea to entrust governments with the power to issue paper money. for governments, he argued, would almost certainly abuse this power. for instance, if circumstances compelled them to create money, such as at times of war. instead, ricardo reasoned, central banks must be governed by individuals who should be “ entirely independent ” of the government, and who “ should never, on any pretence, lend money to the government, nor be in the slightest degree under its control or influence ”. clearly, ricardo ’ s original ideas are still valid today, for most of the world ’ s major central banks enjoy a substantial degree of independence. in fact, it is generally undisputed that central bank independence is the way to protect governments against the temptation to misuse monetary policy for short - term goals – for example, by creating sudden inflation to ease budget pressures. by granting monetary policy to the discretion of an independent central bank, the focus can be on long - run stability. research has also shown that independence enables central banks to