Economics
Central Bank Independence
Central bank independence refers to the degree of autonomy a central bank has from the government in making monetary policy decisions. An independent central bank is able to make decisions based on economic considerations rather than political pressures, which can lead to more stable and predictable monetary policy. This independence is often seen as important for maintaining price stability and controlling inflation.
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10 Key excerpts on "Central Bank Independence"
eBook - PDFBuilding Credible Central Banks
Policy Lessons For Emerging Economies
- N. Tshiani(Author)
- 2008(Publication Date)
- Palgrave Macmillan(Publisher)
Finally, it is critically important to ensure that the central bank is not required to directly underwrite government debt. The Finance Ministry would have an incentive to keep interest rates low to reduce the cost of servicing the government debt. Indeed, perhaps the first principle of Central Bank Independence is independence from the fiscal authority. If independence is also defined in terms of assuring the ability and commitment of the central bank to achieve price stability, this commit- ment can be protected by an explicit price stability mandate from the government. That is, a government that explicitly imposes this mandate is less likely to interfere in a central bank’s pursuit of this objective. Inde- pendence, by this definition, is viewed as greatest if price stability is the exclusive objective of monetary policy, or at least the principal objective. Academic research on the independence of central banks Research and analyses of the economic consequences of Central Bank Independence typically estimate the economic effects by first deriving Central Bank Independence and Accountability: a Trade-off 41 quantitative measures of the relative independence of central banks and then estimating how this measure is correlated with average inflation, inflation variability, and real economic performance. Reviewing three of these studies would help to elucidate the meaning and sources of Central Bank Independence and perhaps provide at least some insights into how the Central Bank of the Congo ranks relative to other central banks in terms of independence. Bade and Parkin (1988) ranked the political independence of twelve industrial country central banks on the basis of answers to questions such as the following: Is the bank the final policy authority? Is there any government official (with or without voting power) on the bank board? Grilli et al.
eBook - PDF10% Less Democracy
Why You Should Trust Elites a Little More and the Masses a Little Less
- Garett Jones(Author)
- 2020(Publication Date)
- Stanford University Press(Publisher)
If the prime minis-ter or president gets upset with the head of the central bank, could he fire her just like he would a defense minister or a White House chief of staff? If not—if the central bank president had something like CENTRAL BANK “INDEPENDENCE” 45 tenure—then that was one sign that the central bank was somewhat independent of the political system. Harvard’s Alesina and Summers note that CBI is typically broken down into “political independence” and “economic independence.” They summarize political independence: Whether or not its governor and the board are appointed by the government, the length of their appointments [longer is more in-dependent], whether government representatives sit on the board of the bank [a bad sign], whether government approval for mon-etary policy decisions is required [another bad sign] and whether the “price stability” objective is explicitly and prominently part of the central bank statute [a good sign—a sign of focus]. 3 Economic independence is different: it measures whether the central bank is permitted to say “No!” to the government. After all, many nations have been ruined by governments that forced the central bank to lend the government money on easy terms, setting off inflationary and even hyperinflationary spirals. Alesina and Sum-mers’s summary of economic independence: The ability to use instruments of monetary policy without restric-tions. The most common constraint imposed upon the conduct of monetary policy is the extent to which the central bank is required to finance [the] government deficit. 4 Think of an economically independent central bank as one that is free to ignore the government’s requests for cheap money. The early CBI work focused on the same countries this book does: the relatively prosperous countries, mostly in Western Europe, North America, and East Asia.
- Cristopher Ballinas Valdés(Author)
- 2011(Publication Date)
- Palgrave Macmillan(Publisher)
5 The Central Bank Introduction The idea of central bank autonomy is taken for granted as a feature of the modern economy. The creation of autonomous central banks appears as the most prominent example of institutions insulated from the direct influence of elected officials and political cycles. Independent central banks thus provide a satisfactory protection from politicians’ temptation to manipulate monetary policies in order to obtain short-term gains (i.e. votes), disregarding the long-term cost that this decision might have (i.e. inflation). Politicians decided to give up control of monetary policy to provide more politically neutral policy solutions that are not easy to accomplish in the context of partisan politics. This idea has produced an increase in the independence of central banks over a wide swathe of nations. Central Bank Independence has been a growing theme since the Second World War. 1 During the 1990s, concerns about central bank autonomy reached new heights. In the few short years between 1990 and 1995, 35 countries legislated increases in the autonomy of their central banks, representing the highest rate of change in 50 years (Maxfield, 1997a). 2 Consequently, there has been an increasing interest in these autonomous institutions, and a considerable and growing literature studying central banks, especially in advanced democracies. 1. Approaches to Central Bank Independence Independent central banks have largely been associated with low infla- tion and an overall economic stability. These ideas were confirmed by numerous quantitative studies that showed an inverse relationship 105 106 Political Struggles and Agency Forging between central banks’ independence and inflation. 3 Complemen- tary studies showed that economies with independent central banks were less prone to political cycles (Clark, 2003; Clark and Hallerberg, 2000; Clark et al., 1998).
- Fausto Vicarelli, Richard Sylla, Alec Cairncross, Jean Bouvier, Carl-Ludwig Holtfrerich, Giangiacomo Nardozzi, Gianni Toniolo(Authors)
- 2012(Publication Date)
- De Gruyter(Publisher)
Central Bank Autonomy 5 significant index by which the political independence of the bank can be measured, an independence which is based on its institutional role as guaran-tor of the stability of currency value. The conduct of the central bank following the Keynesian view has fewer certainties on which to call, although this does not mean that it is in any way indeterminate. The complexity of the existing links between industrial and monetary forces, even in the short term, does not offer clear and absolute behavioural rules, but only criteria deriving from an analysis of the perform-ance of the system in the period under consideration. The quantity of money is a revealing indicator of the monetary policy pursued - not the only one, to be sure - within a system of financial flows whose complete picture cannot be established without taking into account the levels and the structure of interest rates and, above all, the wider range of objectives of economic policy-mak-ers. Plurality of objectives and the search for the most appropriate policies characterize this view of the role of central banking. Central bank autonomy, in this context, is related to the bank's autonomous capacity to identify and put into effect the criteria and policy instruments held to be most appropriate for attaining the bank's own objectives. The defence of monetary stability is certainly one of the most important of the objectives assigned to the central bank, but its achievement is hardly ever separated from that of complemen-tary targets such as that of relative exchange rate stability which in an open economy certainly requires consistent fiscal and monetary policies which are beyond the competence of the bank itself. Consequently, no judgement of the level of autonomy can be based on the degree to which given objectives are achieved or, in a wider sense, to the effectiveness of monetary policy.
eBook - PDF- Lawrence Saez(Author)
- 2004(Publication Date)
- Palgrave Macmillan(Publisher)
These include the appointment, length of tenure, and the duties of central bank governors and statutory regulations regarding the scope of the central bank’s influence on monetary policy. Some indices are based on the actual turnover of central bank governors. There are also indices that measure independence based on the legal limitations imposed by the charter of central banks. The autonomy of the central bank has been a recurrent theme in the literature on monetary policy of central banks. There is wide cross-country variation in the central bank’s relationship to the central government. In some countries, the central bank is almost viewed as being subordinate to the government insofar as the government determines monetary policy. In devel- oped markets, the Bank of England, the Bank of Japan, and the Bank of France are all examples of central banks that lack independence. Broadly developed markets tend to have central banks that are independent from other branches of government. The model for an independent central bank is the U.S. Federal Reserve. In the United States, the Board of Governors of the Federal Reserve System is an independent agency that has the discretion to determine the precise means by which monetary policy goals will be achieved, without being subjected to the control of other government officials. In contrast, emerging markets tend to have central banks that lack autonomy from other branches of government. Aside from political considerations, the decision to have an independent central bank stems from empirical evidence that independent central banks are more likely to stave off inflation and to assure price stability. In his seminal article, Rogoff (1985) argued that by delegating monetary policy to an independent, conservative central banker the governmental inflationary bias could be reduced, because the primary goal of the conservative Central Bank Independence ● 105
- Panicos Demetriades(Author)
- 2019(Publication Date)
- Agenda Publishing(Publisher)
Thus, the euro area can, in principle, be characterized as an area of “monetary dominance” over “fiscal dominance”. Even so, at times of difficulty Eurosystem central banks have come under pressure by their respective governments to help reduce public debt through sales of gold reserves. 6 Financial and personal independence Monetary dominance clearly helps to safeguard CBI, but by itself it is not sufficient to ensure that a central bank can act independently from the government. Financial independence of the central bank is another important dimension. If a central bank budget needs to be approved by government or parliament, a central bank will almost certainly come under political pressure that would jeopardize its independence. Financial independence for a central bank entails having sufficient resources to carry out all the tasks and functions it deems necessary to achieve its objectives. To this end, the central bank needs to generate enough revenue through its monetary policy operations, investments and other activities to cover its costs. Importantly, it should be able to attract and retain sufficiently high-quality staff and have adequate premises, infrastructure and facilities. Any profits generated can be distributed back to government only once adequate provisions are made and only if the central bank is adequately capitalized. Adequate levels of central bank capital are needed to protect the central bank against losses, which may occur, for example, if a bank that has borrowed from the central bank fails or if there is a decline in the value of a central bank’s portfolio of assets
eBook - PDFThe Design and Use of Political Economy Indicators
Challenges of Definition, Aggregation, and Application
- K. Banaian, B. Roberts, K. Banaian, B. Roberts(Authors)
- 2008(Publication Date)
- Palgrave Macmillan(Publisher)
CHAPTER 3 Measuring Central Bank Independence: Ordering, Ranking, or Scoring? King Banaian C entral Bank Independence as an area for international comparison and for study by international political economists has been around for approximately two decades, spurred on by the work of Bade and Parkin (1982). It probably reached its full fruition with the work of Cukierman and others, centering on work done at the World Bank. There are others too, and we should not ignore them, but since the mid-1990s most of the work done has centered on the Cukierman-type model. Interest in the CBI intensified after models of monetary policy found the likelihood of an inflationary bias in monetary policy operated by democratic governments. That analysis turned on the potential for mon- etary surprises being perpetrated by governments seeking electoral advan- tage. Later analysis found that if such incentives were fully anticipated by the public, inflation rates in democracies are higher than they would be if somehow government could make a credible commitment to price sta- bility. The search began for how to establish monetary institutions that can be viewed as credible commitments. Delegation of monetary policy to an independent central bank was one strand of that exploration. It is also believed that independent central banks would reduce the scope of monetization of government budget deficits and thereby put downward pressures on deficits. Cukierman, Webb, and Neyapti (1992) argued, Economists and practitioners in the area of monetary policy generally believe that the degree of independence of the central bank from other K. Banaian et al. (eds.), The Design and Use of Political Economy Indicators © King Banaian and Bryan Roberts 2008 34 ● King Banaian parts of government affects the rates of expansion of money and credit and, through them, important macroeconomic variables, such as inflation and the size of the budget deficit.
eBook - ePub- Heinz Herrmann, David Mayes, Geoffrey E Wood(Authors)
- 2009(Publication Date)
- Routledge(Publisher)
de jure as well as de facto independence and generally used its independence to promote public support for price stability. In spite of this long-term position the Bundesbank’s policy occasionally responded to the electoral cycle. Vaubel (1997) shows that monetary expansion accelerated at the beginning of pre-election periods when the German government had a political majority at the Bundesbank council and that it decelerated when the reverse was true.3 In a few cases such as the ECB and the Banco Central de Chile, the bank is even given some limited goal independence in the sense that it is free to determine its own inflation target.4 For reasons of space I do not discuss the fast-expanding literature on those topics. The March 2007 issue of the European Journal of Political Economy is devoted to CB transparency and communications.5 Previous surveys appear in Eijffinger and de Haan (1996) and in Berger et al. (2001).6 Although related independence and conservatism are not quite the same. Independence refers to the ability of the bank to implement the policies it desires without political interference. Conservatism refers to the importance that the bank assigns to price stability in comparison to real objectives like high levels of economic activity and employment. Obviously, effective conservatism, which determines policy choices, depends both on the bank’s conservatism, as well as on its independence. For the purposes of this survey there is no need to distinguish between those two concepts. I therefore use the terms conservatism and independence interchangeably to mean ‘effective conservatism’. However, there are contexts in which it is useful to keep conservatism and independence apart (Eijffinger and Hoebericht, 1998).
- Thomas F. Cargill(Author)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
This freed the central bank from conducting monetary policy to maintain a fixed exchange rate. Second, the Great Inflation in the United States was part of a worldwide infla-tion problem, with only a few exceptions (such as Japan), and in order to bring the inflation rate down many recommended more independent central banks. Third, the deregulation and financial liberalization process in the last part of the twen-tieth century, the breakup of the Soviet Union and the establishment of the Euro-pean Monetary Union provided opportunities to redesign and/or design new central banking institutions. The long-held conventional wisdom that independent central banks generated better policy outcomes rapidly became public policy in the 1980s and 1990s. Cen-tral bank independence was increasingly recommended as the best institutional design for ensuring that a central bank would contribute to a stable financial and monetary framework and, hence, contribute to economic stability and growth. 246 Chapter 11. Step 1: The Institutional Design of the Central Bank 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 20 30 40 50 60 70 80 90 100 Inflaon rate Index of independence Figure 11.3. Index Based on De Jure Central Bank Independence and Inflation, 1955 to 1988. Sources: The line is based on a regression presented in Cargill ( 2013 ); the data were originally used in Alesina and Summers ( 1993 ), and put into the form used here by Carl-strom and Fuerst ( 2009 ). The conventional wisdom received empirical support in the 1980s and 1990s as researchers developed measures of Central Bank Independence and estimated correlations between inflation and the measures over time and across countries.
eBook - PDFCurrent Federal Reserve Policy Under the Lens of Economic History
Essays to Commemorate the Federal Reserve System's Centennial
- Owen F. Humpage(Author)
- 2015(Publication Date)
- Cambridge University Press(Publisher)
14 The implications for the conduct of monetary policy with regard to inflation are obvious. Central banks should not rely exclusively or primarily on measures of the output gap and of inflation expectations in making their forecasts and the subsequent policy decisions. How to get them to do so is a different matter. Forrest Capie and Geoffrey Wood 146 trade bills. These discount houses were small, and very highly geared. One precaution they took against failure was to know their customers well. The Bank of England in turn gained information from them both about their customers through regular meetings. Hence if we are not to allow central banks to return to banking, substitutes for this detailed and timely infor- mation must be devised. That leads us very conveniently back to the central bank’s relations with its owner, for the owner of course determines what the bank is allowed to do. A crisis, then, can affect central bank–government relations by showing that the contract of ownership, in both its informal and its formal aspects, was in some ways inadequate. The crisis exposed weaknesses in the mandate given to the Bank of England, as well as defects in how the Bank (and the FSA) responded to the crisis. This inevitably required not only action from the government to deal with the crisis, but also changes in the mandate. The former plainly compromises Central Bank Independence. Does the latter? The changes have concentrated authority in the Bank, but of course a consequence of this is that there is more that can go wrong and affect the Bank’s reputation and thus its authority. There are some similarities with the Federal Reserve. Much of Allan Meltzer’s history of the Fed is concerned with its independence. ‘The pur- pose of independence is to prevent government from using the central bank to finance its spending and budget deficit” (2009, p. 1256). But Meltzer argues, following Friedman, that independence needed to be defined in law.
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