The specific role of central bank independence in determining the overall credibility of monetary policy is addressed in this paper. It is argued that the credibility of delegating monetary policy to an independent central bank is endogenous to the credibility of the inflation target because a “conservative” inflation target may not be compatible with the fiscal policy stance. Also, lack of transparency in designing the institutional set-up is shown to be welfare-reducing.
In economically volatile conditions in which it is more difficult for the public to distinguish inflation deliberately generated by government from inflation created by unanticipated economic shocks, the anti-inflationary effect of central bank independence will be unchanged but the effectiveness of exchange rate pegs will be significantly improved. Keefer and Stasavage develop and test several new hypotheses about the anti-inflationary effect of central bank independence and exchange rate pegs in the context of different institutions and different degrees of citizen information about government policies.
This report by the Central Bank Governance Group presents information intended to help decision-makers set up governance arrangements that are most suitable for their own circumstances. The report draws on a large body of information on the design and operation of central banks that the BIS has brought together since it initiated work on central bank governance in the early 1990s. The need to deal with chronic inflation in the 1970s and 1980s prompted the identification of price stability as a formal central bank objective and led to a significant reworking of governance arrangements. The current global financial crisis could have equally important implications for central banks, particularly with respect to their role in fostering financial stability. Although it is too early to know how central banking will change as a result, the report takes an important first step in identifying governance questions that the crisis poses.
ÔThis Handbook is a must read for policy makers and practitioners alike as well as excellent reading for advanced academic courses in international banking.Õ Ð Allard Bruinshoofd, SUERF ÔThis collection of papers is essential reading for anyone interested in central banking, regulation and supervision. Sylvester Eijffinger and Donato Masciandaro have brought together contributions from the leading academics, central bankers and regulators, providing the most up-to-date analysis of this critical subject.Õ Ð Paul Mizen, University of Nottingham, UK This stimulating and original Handbook offers an updated and systematic discussion of the relationship between central banks, financial regulation and supervision after the global financial crisis. The crisis has raised new questions about the compatibility of monetary and financial stability, which are changing the face of central banking and its relationships with the architecture of financial regulation and supervision. The Handbook explores on both the economics and political economy of the topic, in order to understand how and why reforms of the role of the central banks can be designed and implemented. The general suggestion is that future effectiveness of the central banking architecture will depend on its ability to ensure the consistency between the monetary actions in normal and extraordinary times. Consequently the possible paths in the central bank strategies and tactics, as well as in the classic concepts of independence, accountability and transparency, are analyzed and discussed. With chapters written by outstanding scholars in economics, this lucid Handbook will appeal to academics, policymakers and practitioners, ranging from central bankers and supervisory authorities to financial operators. Among the academics it would be of particular interest to financial and monetary economists (including postgraduate students), but the institutional slant and the central theme of relations between economics, institutional settings and politics will also be invaluable for political scientists.
Monetary aggregates continue to play an important role in the ECB's policy strategy. This paper revisits the case for money, surveying the ongoing theoretical and empirical debate. The key conclusion is that an exclusive focus on non-monetary factors alone may leave the ECB with an incomplete picture of the economy. However, treating monetary factors as a separate matter is a second-best solution. Instead, a general-equilibrium inspired analytical framework that merges the economic and monetary "pillars" of the ECB's policy strategy appears the most promising way forward. The role played by monetary aggregates in such unified framework may be rather limited. However, an integrated framework would facilitate the presentation of policy decisions by providing a clearer narrative of the relative role of money in the interaction with other economic and financial sector variables, including asset prices, and their impact on consumer prices.
This book integrates new political and economic elements into the analysis of monetary policy credibility and central bank independence. The author considers imperfect monetary control, rational voters, distributional issues and uncertainty about future policy objectives in his welfare analysis of central banking. The role played by the different institutional elements that contribute to the making of an independent central bank is also assessed. A distinction is made between central bank independence and targets offering new insights into how a more inflation averse monetary policy may actually be achieved. Finally, explanations for the variation of central bank independence and conservatism across different countries are provided. This book will appeal to researchers, academics and policy makers in the fields of monetary policy, financial economics, money and banking and political economy.
This book explores three key areas of central banking and governance - autonomy, accountability and transparency. It looks at links between the areas, as well as assessing the impact of central bank autonomy on macroeconomic performance. The issues are approached from theoretical and empirical perspectives.
