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

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.

Partisan and Electoral Motivations and the Choice of Monetary Institutions Under Fully Mobile Capital

2002 ◽  
Vol 56 (4) ◽  
pp. 725-749 ◽  
Author(s):  
William Roberts Clark
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Exchange Rates ◽  
Central Bank Independence ◽  
Time Inconsistency ◽  
Social Planner ◽  
Fixed Exchange Rates ◽  
Mobile Capital ◽  
Wide Range ◽  
Institutional Solution

Central bank independence and pegged exchange rates have each been viewed as solutions to the inflationary bias resulting from the time inconsistency of discretionary monetary policy. While it is obvious that a benevolent social planner would opt for such an institutional solution, it is less obvious that a real-world incumbent facing short-term partisan or electoral pressures would do so. In this article, I model the choice of monetary institutions from the standpoint of a survival-maximizing incumbent. It turns out that a wide range of survival-maximizing incumbents do best by forfeiting control over monetary policy. While political pressures do not, in general, discourage monetary commitments, they can influence the choice between fixed exchange rates and central bank independence. I highlight the importance of viewing fiscal policy and monetary policy as substitutes and identify the conditions under which survival-maximizing incumbents will view fixed exchange rates and central bank independence as substitutes. In so doing, I provide a framework for integrating other contributions to this volume.

The czech experience with inflation targeting in transition

2000 ◽  
Vol 9 (3) ◽  
Author(s):  
Kateřina Šmídková ◽  
Miroslav Hrnčíř
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Inflation Targeting ◽  
Central Banks ◽  
Communication Strategy ◽  
The Other ◽  
Short Term ◽  
Countries In Transition ◽  
The One

This paper argues that inflation targeting is a strategy that can be under certain conditions adopted by central banks in countries in transition even though their typical goal is to disinflate instead of stabilising low inflation. On the one hand, according to the Czech experience, inflation targeting offers several benefits, such as increasing control over expectations and short-term flexibility of monetary strategy, that are attractive for economy in transition. On the other hand, constraints imposed by period of transition as well as by openness of economy are present no matter which monetary strategy is chosen by the central bank. Implied costs should not be attributed to a particular monetary strategy. Inflation targeting has made various factors constraining monetary policy more visible and, as a result, requirements on the quality of decisions as well as on communication strategy have increased.

scholarly journals Central Bank Independence and Inflation IN EU-28

2017 ◽  
Vol 22 (4) ◽  
pp. 253-262
Author(s):  
Daniela-Georgeta Beju ◽  
Maria-Lenuţa Ciupac-Ulici ◽  
Codruța-Maria Fǎt
Keyword(s):  
European Union ◽  
Central Bank ◽  
Monetary Union ◽  
Central Banks ◽  
Central Bank Independence ◽  
Price Stability ◽  
Economic And Monetary Union ◽  
Great Level ◽  
Member States ◽  
High Level

Abstract Today, both policymakers and academicians consider that the central bank’s main goal is to guarantee price stability. The central bank can sustain the government’s economic policies, but only without prejudicing this objective. In order to focus on price stability several studies found that central bank should have a high level of independence. This is why during the recent decades the majority of developed countries, but also several emerging economies have employed institutional reforms that conferred their monetary authorities – the central bank – more independence. Within the European Union the central bank independence is a crucial issue, since the Maastricht Treaty stipulates that one requirement for joining Economic and Monetary Union for the candidate member states is to give their central banks a sufficiently high level of independence. This official requirement has encouraged the countries from Centre and East Europe engaged on the way to adhere the Economic and Monetary Union to confer their central bank a great level of independence. In this paper we analyze some important theoretic issues about central bank independence. We also make an empirical investigation regarding the evolution of inflation within European Union relative to the independence of member states’ central banks.

Independent Agencies, Distribution, and Legitimacy: The Case of Central Banks

2019 ◽  
Vol 114 (2) ◽  
pp. 591-595
Author(s):  
PETER DIETSCH
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Policy Making ◽  
Central Banks ◽  
Institutional Arrangements ◽  
The Other ◽  
Trade Offs ◽  
The One ◽  
Alternative Solutions

Delegation to independent agencies can reap real benefits for policy-making. In the case of monetary policy, it shores up the credibility of the central bank. However, the discretion of IAs needs to be constrained to ensure their legitimacy. This letter focuses on one potential constraint, namely, the idea that IAs should not make choices on distributional trade-offs. Given that monetary policy today has significant distributive consequences, if this constraint were respected, the independence of central banks would have to be repealed. This would be just as undesirable as a monetary policy whose distributive consequences remain unchecked. Instead, this letter encourages the search for alternative solutions and puts forward three possible institutional arrangements to manage the tension between the distributive consequences of monetary policy on the one hand and central bank legitimacy on the other.

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

2018 ◽  
Vol 43 (1) ◽  
pp. 61-84 ◽  
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 - Economic and Political Dimensions

2006 ◽  
Vol 196 ◽  
pp. 66-76 ◽  
Author(s):  
Ottmar Issing
Keyword(s):  
Political Economy ◽  
Monetary Policy ◽  
Central Bank ◽  
Public Support ◽  
Governance Structure ◽  
Central Banks ◽  
Central Bank Independence ◽  
Price Stability ◽  
Special Role ◽  
Political Dimensions

This article reviews the empirical evidence and theoretical arguments for central bank independence, including political economy considerations. It concludes that the optimal institutional framework to keep inflation lastingly under control is based on granting independence to central banks and establishing price stability as the overriding objective of monetary policy. This framework — combined with appropriate appointment procedures, a sound governance structure and a well-defined monetary policy strategy of the central bank — would ensure price stability. Finally, public support for central bank independence also matters. In this respect, the central bank has a special role in nurturing a stability-oriented culture in society.

Readiness to introduce digital currency: is the central bank independence important?

2021 ◽  
Vol 2021 (3) ◽  
pp. 7-22
Author(s):  
Viktor KOZIUK ◽  
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Development ◽  
Multivariate Regression ◽  
Empirical Test ◽  
Central Banks ◽  
Central Bank Independence ◽  
Quadratic Functions ◽  
Narrow Focus ◽  
High Level

The paper put forward the hypothesis suggesting that central bank’s advances on the way of CBDC projects depend on the level of their independence. At the same time, the theory demonstrates some ambiguity of how to interpret independence in respect of CBDC involvement especially in the case of empirical tests because indexes of central banks independence are tailored to the assessment of relations between monetary authorities’ status and inflation. A high level of the central bank independence index rank may mean a narrow focus on monetary policy, while a low level of independence may mean a lack of resources to be allocated to execute the innovative projects. To avoid such theoretic ambiguity in the empirical test the linearly and quadratic functions are applied in the case of the central bank independence proxy. Such proxy is added by proxies for economic development, innovations and financial development. The role of political regimes is also examined. The empirical results show that the intermediate central banks independence level might play the role in how deeply central banks are plunged in CBDC projects. The Intermediate level is interpreted as a situation when central banks operate with enough financial independence to realize innovative projects but scope of responsibilities goes beyond a narrow focus on monetary policy. But central banks status proxy is valid in the multivariate regression. The most statistically significant driver of advances toward CBDC is financial development. Proxy for innovations is valid only in the univariate regression. In the case of multivariate regression the innovation capacity of the country is less important than financial development and central bank’s status.

scholarly journals Measuring the Time Inconsistency of Monetary Policy in Indonesia

2013 ◽  
Vol 15 (4) ◽  
pp. 321-352
Author(s):  
Rini Rahmahdian ◽  
Perry Warjiyo
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Central Bank Independence ◽  
Time Inconsistency ◽  
Reduced Form ◽  
Policy Preference ◽  
Output Gap ◽  
Conditional Mean ◽  
Before And After ◽  
Asymmetric Preferences

This study measured the time inconsistency of monetary policy in Indonesia using the asymmetric preference parameter in linear exponential loss function of the central bank. Asymmetric central bank preference becomes an important issue since many of the results on the time inconsistency problem under symmetric preferences may no longer hold under asymmetric preferences. Using two sub-samples, i.e. before and after the implementation of central bank independence act, the conditional mean and the conditional variance of the output gap were estimated and then proceed to estimate the reduced form of the model. The results showed the existence of an asymmetric preference parameter before the Bank Indonesia independence act, which indicated the presence of a time inconsistency problem of monetary policy. This finding implies Bank Indonesia put a negative weight instead of positive weight on the output gap prior to its independency. However, after the implementation of central bank independence, the monetary policy of Bank Indonesia has been consistent with symmetric policy preference over price stability and output. Keywords: Time inconsistency, discretionary, monetary policy, asymmetric central bank preference, output gap, inflation bias.JEL Classification : E52, E58

scholarly journals MENGUKUR TIME INCONSISTENCY KEBIJAKAN MONETER DI INDONESIA

2013 ◽  
Vol 15 (4) ◽  
pp. 335-366
Author(s):  
Rini Rahmahdian ◽  
Perry Warjiyo
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Central Bank Independence ◽  
Time Inconsistency ◽  
Reduced Form ◽  
Policy Preference ◽  
Output Gap ◽  
Conditional Mean ◽  
Before And After ◽  
Asymmetric Preferences

This study measured the time inconsistency of monetary policy in Indonesia using the asymmetric preference parameter in linear exponential loss function of the central bank. Asymmetric central bank preference becomes an important issue since many of the results on the time inconsistency problem under symmetric preferences may no longer hold under asymmetric preferences. Using two sub-samples, i.e. before and after the implementation of central bank independence act, the conditional mean and the conditional variance of the output gap were estimated and then proceed to estimate the reduced form of the model. The results showed the existence of an asymmetric preference parameter before the Bank Indonesia independence act, which indicated the presence of a time inconsistency problem of monetary policy. This finding implies Bank Indonesia put a negative weight instead of positive weight on the output gap prior to its independency. However, after the implementation of central bank independence, the monetary policy of Bank Indonesia has been consistent with symmetric policy preference over price stability and output. Keywords: Time inconsistency, discretionary, monetary policy, asymmetric central bank preference, output gap, inflation bias.JEL Classification : E52, E58

Central Bank Independence, Disinflations and Monetary Policy

2008 ◽  
Vol 10 (3) ◽  
pp. 1-20 ◽  
Author(s):  
Ian Down
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Central Bank ◽  
Central Banks ◽  
Central Bank Independence ◽  
Two Measures

Analyses of central bank independence (CBI) have generated two sets of apparently contradictory results - CBI appears to be both inversely related to inflation and positively related to the rise in unemployment and slowdown in economic growth during disinflations. I suggest that these results may issue from autonomous central banks being associated with sharper, more aggressive disinflations. To test the proposition I use two measures of policy stance, one of which contains more information concerning policymaker's expectations than has heretofore been the case. The results suggest a need to qualify yet further the optimality of CBI.

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