scholarly journals Independence Before Conservatism: Transparency, Politics and Central Bank Design

2005 ◽  
Vol 6 (1) ◽  
pp. 1-21 ◽  
Author(s):  
Andrew Hughes Hallett ◽  
Diana N. Weymark
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Central Bank ◽  
Institutional Design ◽  
Central Bank Independence ◽  
Optimal Outcomes ◽  
Second Stage ◽  
Stage Game ◽  
The Government ◽  
Monetary And Fiscal Policy

Abstract The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence.

The Bank of Japan: Central Bank Independence and the Politicization of Monetary Policy

2021 ◽  
Author(s):  
Gene Park
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Prime Minister ◽  
Central Bank Independence ◽  
Executive Power ◽  
Theoretical Justification ◽  
Electoral Incentives ◽  
Economic Stagnation ◽  
Bank Of Japan ◽  
The Government

In April 1998, the Bank of Japan (BOJ) gained legal independence. While the primary theoretical justification was to enhance the central bank’s inflation-fighting credibility, the newly independent BOJ immediately confronted a different and unexpected problem: a long and persistent deflation. As the government battled economic stagnation, debates over the extent to which the BOJ should prioritize overcoming deflation and the policies that should be employed to this end led to a profound politicization of monetary policy. This culminated in the Prime Minister Abe’s landslide electoral victory at the end of 2012 in which he campaigned on overcoming deflation, and then, once in power, effectively took over control of a previously intransigent BOJ Policy Board to reflate the economy. The democratic electoral process paved the way for a reassertion of control over the still legally independent central bank. From a wider perspective, these developments reflect broader changes in Japanese democracy: the greater influence of electoral incentives on policy and the centralization of executive power.

scholarly journals Some Reflections on the Political Economy of Monetary Policy

2020 ◽  
Vol 70 (3) ◽  
pp. 213-228
Author(s):  
Jakob de Haan
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Political Ideology ◽  
Wealth Inequality ◽  
Theoretical Work ◽  
Central Bank Independence ◽  
The Political ◽  
The Government ◽  
Redistributive Effects ◽  
The Impact

AbstractDuring the past decades, central bank independence has been increased in a large number of countries. However, even an independent central bank does not operate in a political vacuum. For instance, governments generally appoint political allies, presuming that consequently the central bank will follow policies that are in line with the governments’ preferences. The first part of this paper reviews recent research on whether the political ideology of the government has any impact on monetary policies pursued. It is argued that if forward-looking data are used to estimate Taylor-rule models for a panel of OECD countries that take country heterogeneity into account, there is no strong evidence for partisan effects on monetary policy. One of the reasons that central bank independence is no longer taken for granted is the acclaimed redistributive effects of monetary policy. The second part of the paper reviews recent research on the impact of conventional and unconventional monetary policy on income and wealth inequality. It is concluded that empirical research provides very mixed evidence on these issues and that it is not well connected to recent theoretical work.

Public investment, inflation persistence and central bank independence

2017 ◽  
Vol 44 (6) ◽  
pp. 976-986 ◽  
Author(s):  
Stephanos Papadamou ◽  
Eleftherios Spyromitros ◽  
Panagiotis Tsintzos
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Central Bank ◽  
Public Investment ◽  
Central Bank Independence ◽  
Inflation Persistence ◽  
Content Type ◽  
Central Banker ◽  
Long Run ◽  
The Uk

Purpose The purpose of this paper is to investigate, both theoretically and empirically, the institutional setting of monetary policy making that mitigates the effects of productive public investment on inflation persistence. Design/methodology/approach In the theoretical approach, the authors consider a simple monetary game model à la Barro-Gordon introducing, apart from stochastic output shocks, indexed wage contracts and public investment effects. Then, the authors empirically produce inflation persistence and public investment persistence by estimating a first-order autoregressive model in a fixed rolling window of 36 months for the UK and also use a dummy in order to incorporate the regime switch in monetary policy since 1997, giving a clear increase in the level of central bank independence. Findings The theoretical framework suggests that an independent central banker could better manage inflation expectations and therefore inflation persistence despite the occurrence of persistent public investment shocks. From the perspective of fiscal policy, the appointment of a conservative and independent central banker could absorb adverse effects on inflation dynamics resulting from persistent expansionary fiscal policies. Empirical evidence in the UK indicates that the creation of an independent monetary policy committee reduces the positive link between public investment and inflation persistence. Practical implications From a monetary policy perspective view, the best response to public investment policies is to increase the degree of independence to alleviate effects on inflation dynamics. From the perspective of fiscal policy, an independent central banker can provide the necessary conditions to undertake a long-run public investment plan, since long-run growth will not be undermined by adverse inflation inertia. Originality/value The authors introduce, in the debate of inflation persistence, both theoretically and empirically, the role of public investment and monetary policy design.

Central Bank Independence and Co-ordinating Monetary and Fiscal Policy

1999 ◽  
Vol 23 (2) ◽  
pp. 7-13
Author(s):  
Brian Henry ◽  
James Nixon ◽  
Stephen Hall
Keyword(s):  
Fiscal Policy ◽  
Central Bank ◽  
Central Bank Independence ◽  
Monetary And Fiscal Policy

scholarly journals Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

2013 ◽  
Vol 5 (2) ◽  
pp. 187-216
Author(s):  
Stefano Gnocchi
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Central Bank ◽  
Optimal Policy ◽  
Government Expenditure ◽  
Policy Mix ◽  
Equilibrium Outcome ◽  
Policy Game ◽  
Monetary And Fiscal Policy ◽  
Fiscal Authority

We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62)

The Political Economy of Monetary Policy

2017 ◽  
Author(s):  
Cristina Bodea
Keyword(s):  
Monetary Policy ◽  
World War I ◽  
Central Bank ◽  
Exchange Rates ◽  
Institutional Arrangement ◽  
Central Banks ◽  
Central Bank Independence ◽  
Rate System ◽  
Fixed Exchange Rates ◽  
The Government

The recent global economic crisis has renewed interest in the nature and history of monetary policy, the distributional effects of central bank policy, central bank governance, and the personalities at the helm of major central banks. In modern times, a country’s central bank formulates, or, to a minimum, implements, a country’s monetary policy, or the process of adjustment of a country’s money supply to achieve some combination of stable prices and sustainable economic growth. Monetary policy depends heavily on a country’s exchange rate system. Under fixed exchange rates, the country’s commitment to keep the level of the currency at a certain level dictates monetary policy to a great degree. As the gold standard was unraveling after World War I, many countries experienced high inflation or even hyperinflation. A similar situation faced monetary policy after the collapse of the Bretton Woods system of fixed exchange rates in the 1970s. By the 1980s, however, countries turned toward central bank independence as an institutional arrangement to control inflation. The current issues surrounding monetary policy have emerged from the historical increase in central bank independence and the 2007 economic and financial crisis. In particular, the opacity of central bank decisions, given their autonomy to pursue stable prices without political interference, has increased the demand for transparency and communication with the government, the public, and financial markets. Also, the 2007 crisis pushed central banks toward unconventional measures and macro-prudential regulation, and brought back into focus the monetary policy of the euro area.

Fiscal and Monetary Policy under External Volatility

2006 ◽  
pp. 4-27
Author(s):  
E. Gurvich
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Central Bank ◽  
Trade Balance ◽  
Commodity Prices ◽  
Russian Economy ◽  
Policy Objectives ◽  
The Government ◽  
The Impact ◽  
Fiscal And Monetary Policy

Specific requirements on macroeconomic policy, stemming from the impact of external volatility on trade balance and fiscal revenues are studied. Income gains or losses of the Russian economy due to variation in the commodity prices are found to range from -9 to +12% of GDP over the last decade. Contribution of the government and the Central Bank to neutralizing windfall revenues is evaluated, an approach to sharing their functions is suggested. It is demonstrated that monetary policy in the post-crisis period has been aimed rather at restraining ruble appreciation, than at smoothing the effect of external volatility. Expediency to formulate fiscal policy objectives and budget rules in terms of structural deficit (adjusted for windfall revenues) is argued.

Mobile Capital, Domestic Institutions, and Electorally Induced Monetary and Fiscal Policy

2000 ◽  
Vol 94 (2) ◽  
pp. 323-346 ◽  
Author(s):  
William Roberts Clark ◽  
Mark Hallerberg
Keyword(s):  
Exchange Rate ◽  
Fiscal Policy ◽  
Central Bank ◽  
Open Economy ◽  
Capital Mobility ◽  
Formal Model ◽  
Central Bank Independence ◽  
Mobile Capital ◽  
The Exchange Rate ◽  
Monetary And Fiscal Policy

The literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics: Capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible. Similarly, examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether. We develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence. We test the model using data from OECD countries. We find evidence that preelectoral monetary expansions occur only when the exchange rate is flexible and central bank independence is low; preelectoral fiscal expansions occur when the exchange rate is fixed. We then explore the implications of our model for arguments that emphasize the partisan sources of macroeconomic policy and for the conduct of fiscal policy after economic and monetary union in Europe.

Global Financial Crisis and Its Impact on Russia

2009 ◽  
pp. 9-27 ◽  
Author(s):  
A. Kudrin
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Financial Crisis ◽  
Central Bank ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Real Economy ◽  
Energy Prices ◽  
Russian Government ◽  
The Real

The article examines the causes of origin and manifestation of the current global financial crisis and the policies adopted in developed countries in 2007—2008 to deal with it. It considers the effects of the financial crisis on Russia’s economy and monetary policy of the Central Bank in the current conditions as well as the main guidelines for the fiscal policy under different energy prices. The measures for fighting the crisis that the Russian government and the Central Bank use to support the real economy are described.

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