Governing Macro Prudential Policy: Do Central Bankers Do it Better?

Abstract

This paper offers a positive analysis of the relationships between macro prudential policy, micro supervision and central banking, presenting two contributions. Starting from the review of the recent theoretical models, which take the issue of the central bank involvement in macro supervision, it has been discovered that one relevant topic is missed: the political economy of the macro supervisory architecture. Here a principal agent model is used to design a political economy framework, which explains how the politicians can shape the central bank governance in addressing financial systemic risks, taking into account both the social and political pros and cons in having a central bank more or less involved in macro supervision. The framework is used to empirically analyse the present settings in 31 countries. We find that central banks in charge of banking micro supervision are likely to get macro prudential powers; on top the same is true the more the central banker is politically dependent. From the point of view of the politicians on the one side the more the central bank already acting as banking micro supervisor, the smaller will be the risk that its involvement in macro supervision will produce negative spillover effects; on the other side the political dependence may represent the commitment devise to mitigate the fear of the politicians to face an over powerful central bank.