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raditionally, central banks around the world were complacent, with stable, low-inflation, and high-growth economic environments. In the period of the so called '€œgreat moderation'€ and many years after, central banks consistently gained respect for their success in maintaining low and stable inflation.

Both policymakers and economists were of the view that controlling inflation would be sufficient to maintain the whole economy of a country. This belief was later reinforced by the introduction of the Inflation Targeting Framework (ITF).

This situation dramatically changed after the subprime mortgage crisis of 2008, when monetary authorities, especially those in the developed world, were forced to take unprecedented measures to deal with the huge scale of the subprime crisis in the US and its worldwide effects. The crisis revealed the fact that central banks were too focused on price stability and had little interest in the financial system.

Central banks did not pay much attention to how their decisions on interest rates affected the behavior of banks. Central banks also seemed to pay much less notice to global economic issues. Simply put, central bankers were accused of running their institutions like running ordinary monetary institutions.

This situation compelled some to thoroughly question the current approaches. Among others, Howard Davies and David Green in their book Banking on the Future: The Fall and Rise of Central Banking (2010) iterated succinctly that central banks '€œneed to rebalance and return to their roots as banks operating within and through the financial system.'€

In the recent crisis, the overhaul in approaches found in new innovative policies were also a direct result of the development of theories of central banking that had been developed up to recent times. Part of these approaches that is also suggested by Davies and Green is for central banks to go back to their roots in the money market and develop their roles in close proximity to the workings of the money market.

It is against this very backdrop that two of the most influential central banks in the world, the Federal Reserve and the Bank of England (BOE), recently decided to take an ever-increasing role in financial stability. In the United Kingdom, for example, banking supervision that was previously in the hands of the Financial Services Authority (FSA) has been incorporated back and combined with the central bank.

The same trend has been occurring in the eurozone, which has developed a concept of handing over all supervision roles of European banks to the European Central Bank (ECB). Claudio Borio, director of research and statistics of the Bank of International Settlements (BIS), mentioned that '€œa return to a broader view of central banking, more in line with its historical origins, has been gaining ground.'€

Unfortunately, efforts that have been carried out by central banks around the world in response to the recent crisis '€” in the form of lowering benchmark interest rates, asset-buying programs and liquidity injections into banks '€” have not yielded clear long-term positive results.

In some cases, these monetary tools have even caused some negative disruptions, such as an increase in financial market volatility. In developing countries such as Indonesia, monetary easing and tapering have contributed to negative pressure resulting in swift changes in capital inflow and outflow that acts as a constant potential threat.

Interest rate-related policy tools, which had been generally trusted to be effective in influencing the pace of economic growth, have lately been met with increased skepticism. Benchmark interest rates in both the US and the eurozone, which have been near zero territory for quite some time have yet to deliver consistent robust growth. Direct interventions in the form of credit, such as those done by BOE and ECB through commercial banks also seem to have failed to truly generate satisfactory results.

The global financial and economic situation that has changed ever so swiftly has resulted in central banks relying not only on conventional policies, but also non-conventional ones in a policy-mix approach. Whatever responses to be had from the public, be they positive or negative, from the efforts of central banks at the end would be directly correlated to the actual results and economic impacts that follow.

The steps taken by central banks in adopting unconventional policies and in many cases, experimenting with them, have drawn negative criticism, particularly because the question of whether these types of actions are within banks'€™ jurisdictions are often raised.

Many are of the opinion that governments ought to be the ones to plunge deep into these territories and that central banks'€™ involvement in non-conventional interventions weakens the motivation for governments to take real structural reforms and adopt beneficial fiscal policies that are needed.

Charles Plosser, the president and chief executive of the Federal Reserve Bank of Philadelphia, in his assessment, even concluded that this '€œblur'€ could happen even within the context of cooperation between fiscal and monetary authorities and could be potentially harmful to economic performance in the long term.

Plosser considers that once this boundary is violated, central banks will most likely face pressure from the private sector, financial markets or governments to use the bank'€™s balance sheet to intervene in the financial markets or engage in other actions to substitute fiscal decisions. On the other hand, some observers such as Philipp Hildebrand, the ex-Chairman of the Swiss National Bank that the steps taken by central banks recently are '€œextraordinary measures to avert the worst case and buy time'€ and that structural reforms need to be made by governments and parliaments.

In light of the conditions mentioned above, central banks'€™ policies need more than ever to be communicated to their stakeholders with a good strategy. Understanding what stakeholders want and predicting their reaction to certain policies have become an upmost strategic and important issue.

Transparency in communicating policies needs an excellent communication strategy on the part of the central banks, which is easy to understand and is able to direct the expectation of stakeholders in the right direction.
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The writer is executive director,and head of Bank Indonesia regional for Sumatra. This is a personal opinion.