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 Central Banks

2021 ◽  
pp. 11-28
Author(s):  
Ulrich Bindseil ◽  
Alessio Fotia
Keyword(s):  
Central Bank ◽  
Commercial Banks ◽  
Balance Sheet ◽  
Banking System ◽  
Central Banks ◽  
Reserve Requirement ◽  
Money Creation ◽  
Reserve Banking ◽  
Bank Money

AbstractThis chapter develops further the role of a central bank and its interplay with commercial banks. Together, the two ensure the provision of liquidity to the economy, such that the real sectors are shielded from flows of funds originating from household and investors. We also disaggregate the banking system into two banks to represent deposit flows between banks and their impact on the central bank’s balance sheet, and to distinguish between what we call “relative” and “absolute” central bank intermediation. We then integrate deposit money creation by commercial banks into our system of financial accounts, and revisit some old debates, such as the limits of bank money creation and the role of related parameters that the central bank can set (not only the reserve requirement ratio, but also the collateral framework). Finally, we explain the concepts of “plain money” and “full reserve banking” within the financial accounts, and also discuss in this framework the recent proposals regarding central bank digital currency (CBDC).

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.

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.

Price Stability and Central Bank Independence: Discipline, Credibility, and Democratic Institutions

2014 ◽  
Vol 69 (1) ◽  
pp. 35-61 ◽  
Author(s):  
Cristina Bodea ◽  
Raymond Hicks
Keyword(s):  
Central Bank ◽  
Money Demand ◽  
Political Institutions ◽  
Central Bank Independence ◽  
Price Stability ◽  
Inflation Expectations ◽  
The Past ◽  
Political Interference ◽  
Yearly Data

AbstractDespite mixed empirical evidence, in the past two decades central bank independence (CBI) has been on the rise under the assumption that it ensures price stability. Using an encompassing theoretical approach and new yearly data for de jure CBI (seventy-eight countries, 1973–2008), we reexamine this relationship, distinguishing the role of printing less money (discipline) from the public's beliefs about the central bank's likely actions (credibility). Democracies differ from dictatorships in the likelihood of political interference and changes to the law because of the presence of political opposition and the freedom to expose government actions. CBI in democracies should be directly reflected in lower money supply growth. Besides being more disciplinarian, it also ensures a more robust money demand by reducing inflation expectations and, therefore, inflation. Empirical results are robust and support a discipline effect conditioned by political institutions, as well as a credibility effect.

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.

Sign in / Sign up

Export Citation Format

Share Document