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 Developments in Monetary Policies before and after the Recent Financial Crisis and the Change in the Role of Central Banks

2014 ◽  
Author(s):  
Zekayi Kaya ◽  
Erkan Tokucu
Keyword(s):  
Financial Crisis ◽  
Central Bank ◽  
Financial Stability ◽  
Policy Instruments ◽  
Central Banks ◽  
Price Stability ◽  
Lender Of Last Resort ◽  
Monetary Policies ◽  
Recent Financial Crisis

During the historical process, application of the monetary policies and the roles of the central banks have changed within the framework of the developments in the world economy, problems encountered and the economic policies as a solution to these problems. The financial crises after 1990 and the recent financial crisis as the biggest experienced one after 1930s, caused an increase in the importance of the task of providing financial stability besides price stability and in this context in the function of “lender of last resort” of the central bank. The crisis required using new policy instruments in addition to interest rate instrument which was not sufficient enough in providing financial stability and the roles of the central banks in providing financial stability changed. In this study, applications of monetary policies and the changing role of the central banks will be examined. Within this framework, traditional and non-traditional instruments will be explained and the problems that can be confronted by a central bank when providing price stability besides financial stability will be remarked.

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.

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.

scholarly journals The Effect of the Interest Rate Corridor Implementation to Central Bank Policies

2016 ◽  
Author(s):  
Mustafa Batuhan Tufaner ◽  
Kamil Uslu ◽  
İlyas Sözen
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Financial Stability ◽  
Policy Instruments ◽  
Central Banks ◽  
Price Stability ◽  
Ongoing Debate ◽  
Monetary Policies ◽  
Political Effects ◽  
The Interest Rate

Central banks fulfill missions like financing governments, contributing the improvement of the financial market and implement monetary policy. Because of these important functions, instruments of the central bank has become a subject of ongoing debate over the years. The Central Bank's monetary policies instruments are important in terms of achieving the set macroeconomics targets. In recent years to become a major focus of attention of the interest rate corridor instrument has led to examine the structure of the central banks. The interest rate corridor primarily, provides flexibility advantages through interest rate to the central banks. The opinion that the central banks which have a flexible structure are more successful on ensuring the price stability and implementing macro policies with evading the political effects became stronger. In this context, in this study to examine the contributions of a flexible central bank to price stability and financial stability. In this bulletin different policy instruments of central banks are compared and critically assessed various determinants of central bank flexibility. In addition, comparing of the legislation of major central banks and various interest rate corridor implementations are examined.

Peaks and Troughs

2019 ◽  
pp. 58-98 ◽  
Author(s):  
Donato Masciandaro ◽  
Davide Romelli
Keyword(s):  
Political Economy ◽  
Central Bank ◽  
Institutional Design ◽  
Theoretical Perspective ◽  
Central Bank Independence ◽  
Banking Supervision ◽  
Macroeconomic Shocks ◽  
Increasing Trend ◽  
The 2008 Financial Crisis ◽  
Exchange Rate Shocks

This chapter investigates the endogenous evolution of central bank institutional design over the past four decades. From a theoretical perspective, it employs a stylized political economy model to highlight some key determinants of the level of central bank independence as a function of macroeconomic shocks and political economy characteristics of countries. It then employs recently developed dynamic indices of central bank design to describe the evolution of central bank independence over the period 1972–2014. In a sample of sixty-five countries, it shows that the increasing trend in central bank independence during 1972–2007 has been reversing after the 2008 financial crisis, mainly due to significant changes to the roles of central banks in banking supervision. The authors find that this evolution can be related to several macroeconomic shocks, such as inflationary, fiscal, and exchange-rate shocks.

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.

scholarly journals Financial Independence of Central Bank through the Balance Sheet Prism

2014 ◽  
Vol 3 (2) ◽  
pp. 37-59 ◽  
Author(s):  
Valentina Ivanović
Keyword(s):  
Central Bank ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Balance Sheet ◽  
Central Banks ◽  
Central Bank Independence ◽  
Financial Independence ◽  
Balance Sheets ◽  
Financial Strength ◽  
The Global Financial Crisis

Abstract The main reason for central bank independence lies in the fact that it is necessary to clearly distinguish spending money from the ability of making money. Independence of central banks is now a characteristic of almost all developed and highly industrialized countries. In this respect, it represents an essential part of the overall economic reality of these countries. Over the past decade or somewhat earlier, the issue of importance of central bank independence has been raised in developing countries, making the institutional, functional, personal and financial independence of central banks current topics for consideration. The key reason for the growing attention to financial independence of central banks is due to the effects of the global financial crisis on their balance sheets and therefore the challenges related to achieving the basic goals of the functioning of central banks - financial stability and price stability. Financial strength and independence of central banks must be developed relative to the policy and tasks that are carried out and risks they face in carrying out of these tasks. Financial independence represents a key base for credibility of a central bank. On one hand, the degree of credibility is associated with the ability of central banks to carry out their tasks without external financial assistance. In order to enhance the credibility of central bank in this regard, it must have sufficient financial strength to absorb potential losses and that power must be continuously strengthened by increasing capital and rearranging profit allocation arrangements. This is particularly important in times of crisis.

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.

scholarly journals Central Bank digital currencies

Bankarstvo ◽  
2021 ◽  
Vol 50 (3) ◽  
pp. 109-139
Author(s):  
Vesna Martin
Keyword(s):  
Central Bank ◽  
Financial Stability ◽  
Central Banks ◽  
Modern World ◽  
Digital Form ◽  
Technological Transformation ◽  
Advantages And Disadvantages ◽  
Digital Currency ◽  
The Social

Central Bank digital currencies are a digital challenge to the international monetary and financial system. Since the development of cryptocurrency, such as bitcoin, the modern world has faced the possibility of digital technological transformation and providing a digital form of payment for the economy and the household. In addition, the announcement of a digital currency that would have a global reach, such as the Libre issued by the social network Facebook, raised questions about legal and regulatory safeguards, financial stability, and the role of the digital currency in society. All this influenced the leading central banks to recognize the need to conduct a detailed analysis of the possibilities of issuing digital currency of the central bank, which would be a supplement to the cash and non-cash form of payment. These analyzes include considering the advantages and disadvantages of that currency, determining its design and technological solution, as well as the necessary regulatory adjustments. In the coming period, we will witness a technological transformation in the operations of central banks, which, as before, should take care of preserving price and financial stability as its main goals, but also respond to new challenges of digital business.

Central Banking before the Great Recession

2018 ◽  
Author(s):  
Francesco Papadia ◽  
Tuomas Vӓlimӓki
Keyword(s):  
Central Bank ◽  
Great Recession ◽  
Financial Stability ◽  
Central Banks ◽  
Central Banking ◽  
Price Stability ◽  
Great Moderation ◽  
The Great Recession ◽  
Advanced Economies ◽  
The Interest Rate

The chapter describes the historical process as well as the analytical and empirical factors that, at the end of the twentieth century, led to the dominance, in advanced economies, of a central bank model based on an independent institution devoted to price stability as its overriding objective. The central bank pre-crisis model was elegant, performing, and efficient. However, it could not easily accommodate the pursuit of a traditionally important central bank objective: financial stability. Indeed, since central banks have, in essence, just one tool, that is, the interest rate, the pursuit of a financial stability objective in addition to a price stability objective could create dilemma situations. In the two decades between the mid-1980s and the mid-2000s, the economies of advanced economies were very stable, and this period was thus identified as Great Moderation. However, subsequent experience showed that, in this period, the crisis was incubating.

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