The Economic Consequences of Banking Crises: The Role of Central Banks and Optimal Independence

2021 ◽  
pp. 1-17
Author(s):  
DANIEL HANSEN
Keyword(s):  
Central Bank ◽  
Banking Crises ◽  
Central Banks ◽  
Central Bank Independence ◽  
Economic Consequences ◽  
Monetary Theory ◽  
Economic Distress ◽  
Political Independence ◽  
Policy Mandate

A large literature establishes the benefits of central bank independence, yet very few have shown directly negative economic consequences. Furthermore, while prevailing monetary theory suggests CBI should enhance management of economic distress, I argue that independent central banks exhibit tepid responsiveness to banking instability due to a myopic focus on inflation. I show that banking crises produce larger unemployment shocks and credit and stock market contractions when the level of central bank independence is high. Further, I show that these significant economic costs are mitigated when central banks do not have the inflation-centric policy mandates predominantly considered necessary. When the bank has high operational and political independence, banks’ whose policy mandate does not rigidly prioritize inflation produce significantly better outcomes during banking crises. At the same time, I show that this configuration does not produce higher inflation, suggesting it achieves a more flexible design without incurring significant costs.

scholarly journals Central Bank Independence, Financial Instability and Politics: New Evidence for OECD and Non-OECD Countries

2017 ◽  
Vol 9 (7) ◽  
pp. 179
Author(s):  
Pistoresi B. ◽  
Cavicchioli M. ◽  
Brevini G.
Keyword(s):  
Central Bank ◽  
Political Institutions ◽  
Central Banks ◽  
Central Bank Independence ◽  
Financial Instability ◽  
Omitted Variables ◽  
Institutional Variables ◽  
New Evidence ◽  
Bank Money

This paper analyses the determinants of a new index of central bank independence, recently provided by Dincer and Eichengreen (2014), using a large database of economic, political and institutional variables. Our sample includes data for 31 OECD and 49 non-OECD economies and covers the period 1998-2010. To this aim, we implement factorial and regression analysis to synthesize information and overcome limitations such as omitted variables, multicollinearity and overfitting. The results confirm the role of the IMF loans program to guide all the economies in their choice of more independent central banks. Financial instability, recession and low inflation work in the opposite direction with governments relying extensively on central bank money to finance public expenditure and central banks’ political and operational autonomy is inevitably undermined. Finally, only for non-OECD economies, the degree of central bank independence responds to various measures of strength of political institutions and party political instability.

scholarly journals MACROFINANCIAL RESPONSIBILITY OF CENTRAL BANKS: THEORETICAL FOUNDATIONS AND INSTITUTIONAL DILEMMAS

2017 ◽  
pp. 139-157
Author(s):  
Viktor KOZJUK
Keyword(s):  
Political Economy ◽  
Central Bank ◽  
Financial Stability ◽  
Institutional Design ◽  
Policy Instruments ◽  
Central Banks ◽  
Central Bank Independence ◽  
Macroeconomic Fluctuations ◽  
Price Stability

Introduction. Postcrisis tendency to enhance central bank’s macrofinancial responsibility should be related to real-financial inter-linkages rethinking but not to activistic demand management. Different approaches on how price stability and financial stability are inter-related, as well, as different institutional modalities of how to achieve them are making more complicate optimal institutional design of central bank with increased zone of responsibility. Purpose. Taking into account different macroeconomic viewpoints on the role of financial instability in macroeconomic fluctuations and institutional challenges for central bank independence the purpose of the paper is to validate that enhanced macrofinancial responsibility of central banks should be balanced by additional measures in direction to facilitate autonomous regulatory status. Results. Different views on how to enhance macroeconomic stability and what the role of central banks in new macrofinancial environment provide serious challenge for optimal designing of central bank’s macrofinancial responsibility. The problem not only relate to how price and financial stability are inter-related but also to how define the wrong way policy then price and financial stability are in non-linear relations. The difficulties in this segment may affect far reaching political consequences while assessing central bank from political economy point of view. Also it is necessary to take into account that macroprudential toolkit may overlap with monetary policy instruments providing additional regulatory distortions. Clear institutialisation of relations between price and financial stability responsibilities will help to avoid political economy type of manipulations with central bank new tasks. Priority of price stability should be kept while financial stability mandate should be clarified and tied to macroprudential regulation. In the same time more active central bank’s participance in the post-crisis economy should be based not on standard Keynesian activism but on enhanced financial responsibility balanced with protection of central bank independence in new regulatory areas. Conclusions. It the article it is stressed that enhanced macrofinancial responsibility should be based on unchanged priority of price stability mandate, increased level of central bank independence and coordination between monetary and macroprudential policies. It is shown that vulnerability of macrofinancial responsibilities to political pressure is going to increase. Political independence of central banks should protect them in the area of price stability and financial stability all together.

scholarly journals Central Bank Independence and Financial Stability: Orthodox and Heterodox Approaches

2017 ◽  
pp. 6-27 ◽  
Author(s):  
Viktor Koziuk
Keyword(s):  
Central Bank ◽  
Financial Stability ◽  
Institutional Environment ◽  
Central Banks ◽  
Central Bank Independence ◽  
Price Stability ◽  
Regulatory Regime ◽  
Financial Cycle ◽  
Stability Issues

This study argues that post-crisis discussions on central bank independence are less about a choice of a level of independence but more about a relation between the independence and the central bank mandate in financial stability. An offered hypothesis states that an increasing role of financial factors in the macroeconomic policy agenda has led to emerging of two approaches to the central bank independence. Within the orthodox approach, responsibility for the financial stability is a challenge to the accepted model: one mandate – one goal – one instrument. Interference into the financial cycle impairs transparency and distorts responsibility, while deflation bias risks get in conflict with price stability principles, adherence to which is exactly what central banks are granted independence for. In terms of the heterodox approach, a wider responsibility of central banks for financial stability requires more independence to protect the legitimacy of interference into the financial cycle and implementation of a more prudent regulatory regime. Orthodox view is contradictory in its nature, while the vulnerability of the second approach lies in quality of institutional environment. Price stability mandate is argued to remain the first priority, while the financial stability issues should be institutionalized in a clearer way to secure independence.

scholarly journals Central Bank Independence – The Case of the Central Bank of Montenegro

2018 ◽  
Vol 7 (3) ◽  
pp. 25-40
Author(s):  
Milivoje Radovic ◽  
Milena Radonjic ◽  
Jovan Djuraskovic
Keyword(s):  
Economic Theory ◽  
Central Bank ◽  
Inflation Rate ◽  
Central Banks ◽  
Transition Countries ◽  
Central Bank Independence ◽  
Executive Power ◽  
Eu Accession ◽  
Key Factor ◽  
The Eu

Abstract In recent decades, there has been a trend in increasing the level of independence of central banks. The key factor that has contributed to a growing interest in this concept is grounded in economic theory that confirms the link between a lower inflation rate and a greater level of central bank independence. For this reason, in many countries, the existing regulations relating to central bank have been modified to protect its position from the absolute influence of the executive power of the state. This trend was particularly prevalent in transition countries, which was conditioned primarily by the EU accession criteria. The aim of this paper is to analyse independence of the Central Bank of Montenegro through the prism of functional, institutional, financial, and personal independence, and to assess the level of its legal independence by using appropriate indices.

scholarly journals Central Bank Independence, Transparency and Accountability Indexes: a Survey

2014 ◽  
Vol 7 (1) ◽  
pp. 35-54 ◽  
Author(s):  
Florin Cornel Dumiter
Keyword(s):  
Central Bank ◽  
Central Banks ◽  
Central Banking ◽  
Central Bank Independence ◽  
Advantages And Disadvantages ◽  
Aggregate Index ◽  
Central Bank Transparency ◽  
Considerable Impact ◽  
High Degree ◽  
Transparency And Accountability

Abstract Recently, the remarkable trend upon central bank independence and the efficient monetary policy were seriously highlighted in the monetary economics field. Starting from 1990s’ central bank independence was at the core of policy making and central banking problems, because of the widespread economical, political, personal and budgetary autonomy of the central bank. Nowadays, we can observe an increasing trend upon central bank transparency, for evaluating more accurate the central bank’s performances by the wide public, mass-media and financial markets. Consequently, a central bank must encompass a high degree of accountability and responsibility, because of the final liability in case of failure. In this paper we present, analyze and assess the construction of the most important indices regarding central bank independence, transparency and accountability in a chronological manner, presenting also the advantages and disadvantages of these indices related to actual practices of central banks. Moreover, we analyze the analytical results of the empirical testing of these indices with a considerable impact upon the developed and developing country group. In regard with the empirical results of different authors, we suggest the importance and the necessity for constructing an aggregate index for measuring central bank independence, transparency and accountability, based on de jure stipulations and the actual practices of the central banks.

Monetary Theory: Overview and Liquidity Extensions

2016 ◽  
Author(s):  
Guillermo Calvo
Keyword(s):  
Financial Crisis ◽  
Central Bank ◽  
Price Level ◽  
Central Banks ◽  
Linear Constraints ◽  
Relative Price ◽  
Monetary Theory ◽  
Quantitative Easing ◽  
Liquidity Shock ◽  
New Crop

The chapter points out some deficiencies of the mainstream model utilized by many central banks. It also reviews the Fiscal Theory of the Price level. Extending the barebones version of the central banks' model presented here to the case in which "land" is endowed with liquidity, the chapter shows, among other things, that if land is subject to Liquidity Crunch, increasing the supply of liquidity by pump-priming high-powered money fails to send land's relative price back to pre-liquidity-shock level. This helps to give a rationale for Quantitative Easing in which the central bank purchases "toxic assets" with high-powered money. The chapter includes extensions to account for banks and liquidity as a factor of production, and it ends with a critique of the new crop of financial crisis models, especially those stressing non-linear constraints.

Does Central Bank Independence in Arab Oil Exporters Matter?

2019 ◽  
pp. 119-148 ◽  
Author(s):  
Hoda Selim
Keyword(s):  
Central Bank ◽  
Oil Prices ◽  
Macroeconomic Policy ◽  
Executive Branch ◽  
Central Banks ◽  
Institutional Arrangements ◽  
Central Bank Independence ◽  
Policy Outcomes ◽  
Policy Performance ◽  
Weak Institutions

This chapter shows that central banks in Arab oil exporters are not independent. Low independence reflects institutional arrangements that allow the executive branch to influence, interfere, even dominate central bank operations. In a context of weak institutions, central bank independence (CBI) has not always mattered for macroeconomic policy outcomes. Gulf Cooperation Council (GCC) central banks delivered a better macroeconomic policy performance than those of the populous group because the credible peg discouraged discretion. Soft peg arrangements in the populous economies, in a context of weak institutions and discretionary policymaking and no de facto independent central bank, led to disappointing monetary policy outcomes. As oil exporters adapt to a new normal of low oil prices, the sustainability of fixed exchange rate regimes may not be guaranteed without sound macroeconomic institutions. Stronger institutions and effective accountability mechanisms are needed to insulate central banks from political pressures. In the short term, a rules-based framework could help.

Monetary Policy Committees and Central Bank Communication

2020 ◽  
pp. 19-44
Author(s):  
Nicole Baerg
Keyword(s):  
Central Bank ◽  
Size Composition ◽  
Central Banks ◽  
Empirical Literature ◽  
Inflation Expectations ◽  
Policy Changes ◽  
Central Bank Communication ◽  
Central Bank Transparency ◽  
Key Policy

This chapter starts by tracing trends in central bank transparency. It reports key policy changes by some of the world’s most important central banks: the FOMC, the European Central Bank, the Bank of England, and the Bank of Japan. The second section reviews the theoretical and empirical literature on central bank design, paying close attention to the role of committee size, composition, and decision-making protocol, and classifies central banks around the world according to these features. The third section outlines the aim of central bank communications: to broadcast news and to reduce noise. The author argues that while previous literature has examined both committee design and central bank communications, it has done so in isolation. By putting these two topics together, the chapter argues that we can better understand, first, how different types of committees may be better at communicating and, second, how communication affects households’ inflation expectations and inflation.

scholarly journals From cash to central bank digital currencies and cryptocurrencies: a balancing act between modernity and monetary stability

2020 ◽  
Vol 47 (4) ◽  
pp. 911-938 ◽  
Author(s):  
Ansgar Belke ◽  
Edoardo Beretta
Keyword(s):  
Central Bank ◽  
Financial Stability ◽  
Service Providers ◽  
Central Banks ◽  
Payment Systems ◽  
Content Type ◽  
Paper Money ◽  
Payment Instruments ◽  
Tier System

PurposeThe paper explores the precarious balance between modernizing monetary systems by means of digital currencies (either issued by the central bank itself or independently) and safeguarding financial stability as also ensured by tangible payment (and saving) instruments like paper money.Design/methodology/approachWhich aspects of modern payment systems could contribute to improve the way of functioning of today's globalized economy? And, which might even threaten the above-mentioned instable equilibrium? This survey paper aims, precisely, at giving some preliminary answers to a complex – therefore, ongoing – debate at scientific as well as banking and political levels.FindingsThe coexistence of State's money (i.e. “legal tender”) and cryptocurrencies can have a disciplining effect on central banks. Nevertheless, there are still high risks connected to the introduction of central bank digital currency, which should be by far not considered to be a perfect substitute of current cash. At the same time, cryptocurrencies issued by central banks might be exposed to the drawbacks of cryptocurrencies without benefiting from correspondingly strong advantages. A well-governed two-tier system to be achieved through innovation in payment infrastructures might be, in turn, more preferable. Regulated competition by new players combined with “traditional” deposits and central bank elements remains essential, although central banks should embrace the technologies underlying cryptocurrencies, because risk payment service providers could move to other currency areas considered to be more appealing for buyers and sellers.Research limitations/implicationsWe do not see specific limitations besides the fact that the following is for sure a broad field of scientific research to be covered, which is at the same time at the origin of ongoing developments and findings. Originality and implications of the paper are, instead, not only represented by its conclusions (which highlight the role of traditional payment instruments and stress why the concept of “money” still has to have specific features) but also by its approach of recent literature's review combined with equally strong logical-analytical insights.Practical implicationsIn the light of these considerations, even the role of traditional payment systems like paper money is by far not outdated or cannot be – at this point, at least – replaced by central bank digital currencies (whose features based on dematerialization despite being issued and guaranteed by a public authority are very different).Social implicationsNo matter which form it might assume is what differentiates economic from barter transactions. This conclusion is by far not tautological or self-evident since the notion of money has historically been a great object of scientific discussion. In the light of increasingly modern payment instruments, there is no question that money and the effectiveness of related monetary policies have to be also explored from a social perspective according to different monetary scenarios, ranging from central bank digital currencies to private currencies and cash restrictions/abolition.Originality/valueThe originality/value of the following article is represented by the fact that it (1) refers to some of the most relevant and recent contributions to this research field, (2) moves from payment systems in general to their newest trends like cryptocurrencies, cash restrictions (or, even, abolition proposals) and monetary policy while (3) combining all elements to reach a common picture. The paper aims at being a comprehensive contribution dealing with "money" in its broadest but also newest sense.

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