Financial Crisis: The Capture of Central Banks by the Financial Sector?

Abstract

This article analyzes the question of whether central bank capture by the financial sector has increased in the aftermath of the financial crisis beginning in 2007. According to the Public Choice theory, this is inevitable: The financial sector has an increased incentive to capture the central bank for interest rates hikes, inter alia, to prevent inflationary pressures from unconventional monetary policies. On the contrary, for the Post-Keynesian democratic school, this is likely but not inevitable because central bank capture is a complex phenomenon depending on a contest between several actors. The relative ability of the financial sector to affect central bank interest rates, and in which direction it desired to do so, can be time varying. Motivated by profitability, the financial sector can be interested in either interest rate hikes or cuts. This article investigates empirically this theoretical debate for the period from January 1999 to December 2016 for the European Central Bank’s Governing Council, the Federal Reserve’s Board of Governors, and the Monetary Policy Committee of the Bank of England. We participate in this debate first by constructing, as standard in the literature, an F index indicating the ratio of central bankers with financial career background. Secondly, we test empirically the competing hypotheses on the capture of the central bank interest rate by estimating its relationship with our F index. Results are more favorable to the democratic school.