On the impossibility of central bank independence: four decades of time- (and intellectual) inconsistency

Christopher A Hartwell

doi:10.1093/cje/bex083

On the impossibility of central bank independence: four decades of time- (and intellectual) inconsistency

Cambridge Journal of Economics ◽

10.1093/cje/bex083 ◽

2018 ◽

Vol 43 (1) ◽

pp. 61-84 ◽

Cited By ~ 2

Author(s):

Christopher A Hartwell

Keyword(s):

Central Bank ◽

Political Institutions ◽

Institutional Analysis ◽

Financial System ◽

Central Banks ◽

Central Banking ◽

Central Bank Independence ◽

Time Inconsistency ◽

Fortieth Anniversary

Abstract The intellectual justification for modern central banking, time-inconsistency, celebrated its fortieth anniversary in 2017 alongside the Cambridge Journal of Economics. However, the key progeny of the time-inconsistency literature, central bank independence, has fundamental flaws that have been thus far neglected in mainstream research. In the first instance, the argument for independence relies on a utilitarian rather than institutional analysis, one that neglects the genesis of central banks and their relation to other institutions within a country. Second, central bank independence neglects the complex interdependencies of the global monetary and financial system. Applying an institutional lens to the concept of central bank independence, I conclude that ‘independence’ fails under the reality of globalization as much as it does in a domestic context. With central banks reliant on all manner of political institutions, they are never really independent operationally or in terms of policy.

Central Bank Independence, Transparency and Accountability Indexes: a Survey

Timisoara Journal of Economics and Business ◽

10.2478/tjeb-2014-0002 ◽

2014 ◽

Vol 7 (1) ◽

pp. 35-54 ◽

Cited By ~ 3

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.

Central Bank Independence

50 Years of Central Banking in Kenya ◽

10.1093/oso/9780198851820.003.0004 ◽

2021 ◽

pp. 39-67

Author(s):

Patrick Njoroge ◽

Désiré Kanga ◽

Victor Murinde

Keyword(s):

Central Bank ◽

Financial Stability ◽

Financial Regulation ◽

Central Banks ◽

Central Banking ◽

Central Bank Independence ◽

First Century ◽

Fiscal Discipline ◽

Key Issues ◽

Personal Accountability

The chapter covers central bank independence broadly and makes use of rich literature to bring out key issues on central bank independence from the inception of central banking in 1668 to the twenty-first century. The chapter identifies four measures of central bank independence mainly focusing on legal characteristics. The findings of the study point to benefits associated with independence of central banks, including management of inflation. Also, it is found that delegating monetary policy to an independent central bank increases debt sustainability and fosters fiscal discipline. It is noted that central bank independence needs to be reconciled with the requirements of institutional and personal accountability of the governors. Further, the financial regulation role should be strengthened in the mandates of central banks as the objective of price stability does not necessarily foster financial stability.

A Post-Keynesian Perspective on the Rise of Central Bank Independence

The Oxford Handbook of Post-Keynesian Economics, Volume 2 ◽

10.1093/oxfordhb/9780195390759.013.0013 ◽

2013 ◽

pp. 264-289

Author(s):

Joerg Bibow

Keyword(s):

Monetary Policy ◽

Central Bank ◽

Monetary Economics ◽

Central Banks ◽

Central Bank Independence ◽

Time Inconsistency ◽

Economic And Monetary Union ◽

Wide Range ◽

Historical Role ◽

The One

Central bank independence (CBI) refers to the relation between the central bank and the state, the legislature and executive. In practice, central banks typically engage in a wide range of activities related to the currency sphere and the financial system. The mainstream literature popularizing CBI features a “narrow central bank” approach that concentrates on central banks’ monetary policy functions only, ignoring important interdependencies between monetary policy on the one hand, and central banks’ historical role as government’s banker (as one link to fiscal policy) and their role in safeguarding the financial system’s stability on the other. This chapter investigates the rise in CBI as an apparent success story in modern monetary economics. The worldwide rise in CBI is partly due to the advent of Economic and Monetary Union (EMU) in Europe. This chapter also discusses the time-inconsistency argument for CBI, post-Keynesian criticisms of CBI, and whether John Maynard Keynes’s model of CBI strikes a sound balance between democracy and efficiency.

Understanding the Role of Central Banks in the Financial System

Advances in Finance, Accounting, and Economics - Monetary Policies and Independence of the Central Banks in E7 Countries ◽

10.4018/978-1-7998-1643-0.ch003 ◽

2020 ◽

pp. 40-64

Keyword(s):

Central Bank ◽

Interest Rates ◽

Critical Role ◽

Balance Sheet ◽

Financial System ◽

Central Banks ◽

Central Banking ◽

Historical Background ◽

Monetary Policies

The main responsibility of the central banks is to implement monetary policies. In this framework, they define interest rates and the amount of the money in the financial system. Hence, it can be said that central banks have the critical role in the development of the financial system. Because of this situation, it is obvious that central banks should satisfy some requirements, such as independence, in order to contribute to the effectiveness of the financial systems. Parallel to this aspect, this chapter aims to understand the role of the central banks in the financial system. In this context, the purpose and historical background of the central banking are explained. In addition to this situation, the subject of the central bank independence is identified as well. In the final aspect, important accounts in the analytical balance sheet of the central bank are defined.

Financial crisis and central bank independence and governance (CBIG) in the Asia Pacific.

Corporate Ownership and Control ◽

10.22495/cocv8i2c2p7 ◽

2011 ◽

Vol 8 (2) ◽

pp. 313-335 ◽

Cited By ~ 1

Author(s):

Amirul Ahsan

Keyword(s):

Economic Growth ◽

Financial Crisis ◽

Central Bank ◽

Central Banks ◽

Central Banking ◽

Central Bank Independence ◽

Asia Pacific ◽

Positive Relation ◽

Crisis Period ◽

The Impact

This paper examines the impact of financial crisis on central bank independence and governance in 36 Asia Pacific countries. It constructs a unique CBIG index for fifteen years (1991-2005); which has an overall index and six sub-indices covering all the necessary aspects of central banking operations. These indices are ranked first to measure the relative positions of the central banks and then statistically tested their relationship with inflation, economic growth and financial crisis of 1997. It applies a panel data pooled regression model and finds a robust negative relation of CBIG with inflation; moderate positive relation with economic growth; and CBIG in post crisis period is significantly different from the pre-crisis period.

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

International Journal of Economics and Finance ◽

10.5539/ijef.v9n7p179 ◽

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.

The Political Economy of Monetary Institutions

International Organization ◽

10.1162/002081802760403748 ◽

2002 ◽

Vol 56 (4) ◽

pp. 693-723 ◽

Cited By ~ 90

Author(s):

William Bernhard ◽

J. Lawrence Broz ◽

William Roberts Clark

Keyword(s):

Exchange Rate ◽

Central Bank ◽

Open Economy ◽

Political Institutions ◽

Exchange Rate Regime ◽

Central Bank Independence ◽

Time Inconsistency ◽

Party Competition ◽

Policy Objectives ◽

Exchange Rate Arrangements

In recent decades, countries have experimented with a variety of monetary institutions, including alternative exchange-rate arrangements and different levels of central bank independence. Political economists have analyzed the choice of these institutions, emphasizing their role in resolving both the time-inconsistency problem and dilemmas created by an open economy. This “first-generation” work, however, suffers from a central limitation: it studies exchange-rate regimes and central bank institutions in isolation from one another without investigating how one monetary institution affects the costs and benefits of the other. By contrast, the contributors to this volume analyze the choice of exchange-rate regime and central bank independence together and, in so doing, present a “second generation” of research on the determinants of monetary institutions. The articles incorporate both economic and political factors in explaining the choice of monetary institutions, investigating how political institutions, democratic processes, political party competition, and interest group pressures affect the balance between economic and distributional policy objectives.

Reflections on Central Banking

50 Years of Central Banking in Kenya ◽

10.1093/oso/9780198851820.003.0003 ◽

2021 ◽

pp. 15-38

Author(s):

Patrick Njoroge ◽

Victor Murinde

Keyword(s):

Central Bank ◽

Initial Conditions ◽

Exchange Rate Regime ◽

Bank Regulation ◽

Central Banks ◽

Central Banking ◽

Central Bank Independence ◽

Policy And Practice ◽

Peer Monitoring ◽

Rich Countries

This chapter seeks to code the milestones on the epic journey of central banking from the initial conditions, through the transition, to modern policy and practice today, in a global context and Kenyan perspective. It is argued that although developments in economic theory, evidence, and policy have entrenched the robustness of central banking today, some unresolved issues persist: the issue of central bank independence; exchange rate regime outcomes in natural resource rich countries; bank regulation is still at the crossroads; the challenges presented by globalization and convergence of banking systems are real. The chapter concludes with a futurology of central banking: the future of bank regulation cannot ignore peer monitoring and market discipline; the primary mandate of central banks should be price stability but with some flexibility to respond to extraordinary circumstances; and central bank independence (personnel, financial, and policy independence) is critical for modern central banks.

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

Journal of Central Banking Theory and Practice ◽

10.2478/jcbtp-2018-0021 ◽

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.

Does Central Bank Independence in Arab Oil Exporters Matter?

Institutions and Macroeconomic Policies in Resource-Rich Arab Economies ◽

10.1093/oso/9780198822226.003.0005 ◽

2019 ◽

pp. 119-148 ◽

Cited By ~ 1

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.