Central Bank Independence (You Don't Know What You've Got ‘til It's Gone): The Doug Purvis Memorial Lecture

PurposeThis study investigates the impact of financial development, measured by the ratio of broad money to gross domestic products, on de jure central bank (CB) independence (CBI) in 17 countries in the Asia–Pacific region from 1995 to 2014.Design/methodology/approachThis study uses the feasible generalized least squares (FGLS) approach, which is suitable since the CBI equation suffers from contemporaneous correlation, serial correlation and heteroscedasticity.FindingsThe FGLS results suggest a positive association between CBI and financial market development (FMD). This relationship is confirmed when estimating different indicators of de jure CBI and adopting the panel-corrected standard error estimate. However, the statistical significance of FMD is not supported when the ratio of domestic credit to the private sector to GDP is measured.Research limitations/implicationsIt is significant to have a developed financial system to foster a better CBI. Moreover, it is important to measure the influence of financial market players on the operations of a CB.Originality/valueThe financial market in the Asia–Pacific has improved over the years. Hence, the results show the determinants of CBI in the Asia–Pacific, especially the role of FMD.

Political changes, especially profound ones with a revolutionary potential, always hold serious consequences for the entire economic system of a country in general, and the central bank and its monetary functions in particular. This is even more true in the case of emerging countries with unsettled political circumstances and structures, and with a historic legacy such as the former apartheid system in South Africa. The vexing question then naturally arises what consequences such wide-ranging and profound political changes might have for, inter alia, the central bank of a country. If the transformation takes place against the backdrop of a world-wide accepted increase in the importance of the CBI on the one hand, but involves a political grouping (the ANC) with an initial inclination towards socialism and an alliance with the Communist Party, also involving many jobless and disadvantaged stakeholders on the other, the scene is prepared for an interesting public debate. Such was the situation in South Africa during the early and middle 1990s. The importance of central bank independence (CBI) derives from the argument that the power to create money should be separated from the power to spend it. Governments are more short term orientated, have an inflationary inclination and are tempted to spend money in order to create favourable economic and political environments just before elections. Various studies indicate lower inflation in those countries where independence of their central banks is the strongest. A prime example in this regard used to be the position and policy of Germany's central bank, the Bundesbank. Renowned for its strong stance against inflation and political intervention, this bank obtained wide recognition for its successful monetary policy leading to consistently low inflation. This, in turn, was ascribed to its persistent opposition to political interference. Many other countries around the globe have also increased the independence of their central banks, for example New Zealand, Chile, Britain, France and many South American countries. South Africa belongs to this league because it has improved its central bank's independence both before and after democratisation. Independence for the SARB was not an explicit issue or focal point of debate with regard to monetary matters during a large part of the 1970s and 1980s. However, during the early years of the 1990s it was increasingly discussed more openly and extensively, especially after the end of the apartheid era and the establishment of the above-mentioned new political dispensation and new constitution. The question naturally arises as to the differences between the pre- and post-democratisation versions of CBI in South Africa. The CBI concept has many political connotations and implications and a move either towards or away from democratisation might influence a central bank's independence. This article compares the pre- and post-democratisation situation regarding CBI in South Africa, not only for its own sake, but also to uncover the impact of political transformation on CBI. The discussion of the pre-democratisation phase will especially emphasise developments since 1984, when the well-known De Kock report on monetary policy was released. The post-democratisation phase, on the other hand, started in 1994 with the institution of the Government of National Unity. During 1996 the ANC established a new government and became the sole and effective governing body in the country. The impact of the new government and post-democratisation phase on the SARB became even more explicit when the first ANC-appointed governor assumed office in 1999. It is specifically this phase that the article endeavours to compare with the prior pre-democratisation phase. In pursuing this aim, Section 1 first develops criteria for assessing legal CBI. Political as well as economic yardsticks of the concept will be discussed, emanating from the flood of research on CBI since the 1980s and 1990s. Section 2 focuses on the application of the political yardsticks to the pre-and post-apartheid CBI, whereas Section 3 compares the economic criteria. The results are then presented in a tabulated form to simplify comparison. Section 4 presents a conclusion.

Central bank independence continues to become the global standard for the activities of monetary authorities. Increasing the independence of the central bank is widely acknowledged to decrease inflation by enhancing the credibility of commitments to price stability. This does not create an effect on economic costs in real terms, such as economic growth or employment.In accordance with Article 105 (1) of the Treaty on European Union, the primary objective of the ESCB shall be to maintain price stability. The statutory mandate to aim at price stability will give the ESCB a clear direction for its policy. This idea is rapidly becoming the consensus of academics and policymakers not only in the EU countries, but also all over the world.This paper examines the empirical relationship between central bank independence and the costs of disinflation among the EU countries. Many previous papers suggest that central bank independence has a negative correlation with inflation. Granting greater independence to a central bank associates with lower inflation. However, few papers elucidate the relationship between central bank independence and the costs of disinflation. To investigate the effect of central bank independence on the trade-off parameter, we create estimates for both the EU and the G7. We use various ‘political’ and ‘economic’ indices provided by several papers to gauge central bank independence.The result shows there is a positive correlation between central bank independence and the trade-off parameter in the EU. There are, of course, many other factors that determine output-inflation trade-off or the slope of the Phillips curve, but the clear real cost of disinflation is shown. For the EU countries at least, the growing political independence of central banks may have substantial real effects than in other countries such as those in the G7.However, the evidence of the negative correlation between central bank independence and average rates of inflation shows that the important issue of causality is a negligible factor. There may be a labor market structure that makes reducing inflation more costly. Such factors may increase the value of an independent central bank that maintains low inflation. For example, there may be nominal wage rigidity in the EU.Our empirical evidence suggests that both the incentive to inflate and the costs of reducing inflation may increase with greater central bank independence. Central bank independence delivers lower inflation but with real effects. It is certain that individual countries will have more independent central banks in the near future. Therefore, the problem of disinflation may be a big cost for the EU. The EU unemployment rate is quite high now. That may create many problems for achieving independent central banks.

UNTIL THE EARLY 1990S little scholarly attention was devoted to the politics of central bank independence (CBI). Discussions of CBI focused on its desirability in terms of growth and inflation performance. Little thought was given to how central banks become (more) independent and how they maintain their independence once it is gained.1 Since 1991, however, much has been written on the political determinants of CBI.2 There is now a body of hypotheses and evidence against which to evaluate the emergence and maintenance of CBI in individual countries and in cross-national comparison. The aim of this article is to examine this issue specifically with reference to the Central Bank of Russia (TsBR). The TsBR presents an interesting case for several reasons. First, Russia is an economy in transition; the literature on the politics of CBI has been concerned primarily with developed market economies.3 Secondly, the TsBR is a new central bank, so its institutional position has been the focus of much debate. Finally, during 1992-93, the TsBR presented the astonishing spectacle of a highly independent, inflation-prone central bank at odds with a government committed to tight fiscal and monetary polices. Each of these factors has served to make the politics of central banking in Russia quite different from what has been found in studies of Western countries. The article begins with a brief discussion of the literature concerning the political aspects of CBI. This is followed by an analysis of the TsBR's position with respect to the various dimensions of CBI and a more general section assessing the political underpinnings of CBI in Russia.

In this article I explore the effects of veto players in formal government institutions on gold sale policies in Switzerland, the United Kingdom and Germany. One of the most active areas of recent ...

There has been a recent evolution in the relationship between modern monetary policy and central banking, visible in the now merged study of public economic choices made every day and the features of monetary architectures and institutions. Though previously separate focuses, these are now accepted by academic scholars and policymakers to be two critical areas that are intrinsically linked.

One strand of empirical literature finds that central bank independence (CBI) lowers inflation. Another strand of literature finds that low inflation is a key determinant of reform towards increased CBI. This paper investigates whether either variable can be identified as a first instigator. Using the largest CBI dataset to date, this paper applies rolling balanced-panel Granger causality tests between CBI reform and changes in inflation. For advanced economies, CBI reform is found to significantly lead disinflation, while there is no Granger causality in the opposite direction. Instead, among emerging and developing economies, CBI reforms tend to follow quickly upon disinflation episodes, while the lags from CBI reform to disinflation are long. An interpretation is that in emerging and developing economies CBI reform often followed on crises that involved high inflation, whereas in various advanced economies a shift in thinking about central banking first triggered CBI reform.

The Atlantic Economic Journal is proud to announce that the winner of the Best Article Award is C. James Hueng of Western Michigan University. His paper, entitled, “Central Bank Behavior and Statutory Independence,” appeared in the June 2012 issue of the AEJ. A distinguished committee reviewed all eligible papers published in that same year. The committee was chaired by IAES Vice President Asli Demirguc-Kunt of the World Bank. Members of the committee included the AEJ Board of Editors and IAES Endowment Fund Sponsors. The Managing Editor gratefully acknowledges the participation and diligence of all committee members who participated in the review process. The award emphasizes the intellectual and scholarly approach to economic research which has always been a focal point of the AEJ. This novel paper integrates the policy reaction function literature with the literature on central bank independence (CBI). The paper compares “what central banks actually do as opposed to what they are legislated to do.” The majority of empirical research on the time inconsistency model has been devoted to testing the relationship between economic performance and the degree of central bank independence measured by various CBI indices, such as the legal CBI. However, the distant link between institutional designs and economic performances complicates testing the relationship between the two due to endogeneity and the missing-variable issues. For this reason, the paper focuses instead on a more direct link between CBI indices and the central bank behaviors, and analyzes which aspects of the legal CBI are more consistent with central bank behaviors. Central bank behavior, which reflects the practical CBI, is described by the policy reaction function, in which the monetary policy instrument reacts to information on the state of the economy. If the legal CBI is consistent with the practical CBI, it is expected to be positively associated with the size and the speed of the central banks’ reaction to inflation shocks. The author used macro data from 18 OECD countries during the 1980s to estimate various versions of the Taylor reaction functions. Comparing the estimation results with several published CBI indices, the author found that certain aspects of legislated differences in CBI generate variations in the anti-inflation behaviors of central banks. Atl Econ J (2014) 42:1–2 DOI 10.1007/s11293-014-9412-8

In this survey, we present a number of arguments that question some aspects of the conventional view of central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, while the relevant economic theories focus on the aspect of goal independence, in practice most central banks tend to be only instrument independent. Third, CBI should not be treated as an exogenous variable, but attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems. Fourth, in a number of empirical studies, researchers found CBI to be correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there remains little reason to believe the correlation between CBI and low inflation tells us anything about causality.

Corruption, central bank (in)dependence and optimal monetary policy in a simple model

This article discusses the relationships between populism, economic policy design and central bank independence (CBI). Assuming that 1) a macro (banking) shock can occur, 2) the incumbent government can face a trade-off between bail-out and bail-in and can finance its public spending choosing between taxes and debt; 3) an independent central bank design the monetary policy strategy assuming a long run perspective – i.e. welfare function maximization; 3) labour and financial assets represent the citizens endowment, with the possibility of monetary and banking externalities, it is possible that the majority of citizens prefer an overall policy design – including monetary policy – that are different from the social optimal ones. Then if the incumbent government wishes to please the voters, the political pressure measures the difference between the government goals and the central bank choices. The political pressure can be considered a proxy for a contingent demand of CBI reform – a metrics for de facto CBI. If we define as populist any policy that guarantees anti- elites redistribution without regard for longer term distortions, a populist pressure that promote a more politically dependent central bank can arise when the elites are sophisticated investors, while the majority of citizens are unsophisticated investors.

Since 1990s many countries have moved toward greater central bank independence (CBI) by either amending their Central Bank’s laws or writing them de novo. Also countries of Western Balkans and many other transition countries have moved toward greater CBI. There are many potential benefits associated with greater CBI, and one of them is stable growth of money and liquidity. For a given level of money market development the hypothesis is that a more independent CB is likely to promote more stable growth of money supply (Dželetović et al., 2008). As a result the main research task of this work is to estimate the effects of CBI on money market growth for five Western Balkans countries and five other European transition countries. Because the empirical studies were very limited for the relationship between CBI and money market growth, there were no clear conclusions. In addition, there were different measuring methodologies that attempt to quantify the extent of legal and actual CBI. Related to the main research task, this dissertation has examined the effects of CBI on money market stability (proxied by bank deposit growth) for a sample of 10 countries for a period from 1999-2009 by using fixed effect model. Through this methodology different regressions have been estimated, but the results were not robust and there are no clear finding on the relationship between CBI and money market growth.

So complete is the consensus which now exists over the desirability of central bank independence that it is possible to forget how quickly it emerged.James Forder (2005: 843–4)

This article analyses the relationships between inequality, political pressure, populism and central bank independence (CBI). If there is financial inequality across citizens, monetary policies yield distributional consequences. Political pressure on central bank will increase. A populist wave fuelled by large demand for redistribution with no regard to long term consequences may undermine actual CBI.

Abstracts How has central bank independence (CBI) changed over time and across countries? This paper introduces the most comprehensive dataset on de jure CBI, including country-year observations covering 192 countries between 1970 and 2023. The dataset identifies statutory reforms affecting CBI, their direction, and codes four dimensions of CBI (personnel independence, central bank's objectives, policy formulation, and limits on lending). It includes two CBI indices and a regional diffusion variable. The broader coverage of this dataset has important implications. First, although this dataset coding decisions are generally consistent with previous research, countries included only in this dataset tend to have lower CBI and differ in other dimensions with those previously coded. This suggests that systematically missing data in other data sources may have effects on inferences. Second, extended temporal coverage allows analyzing the evolution of central bank governance for more than a decade since the Global Financial Crisis. Finally, the data show that although there is a global tendency towards more CBI, there is significant variance across and within regions, including numerous reforms reducing CBI in the past two decades. This data contribution is important for research beyond the study of monetary institutions and their effects.