Central Bank Independence Research Articles

Climate-related risks to central bank independence: the depoliticisation and repoliticisation of the Bank of England in the transition to net zero

ABSTRACT Faced with ever-growing climate-related financial risks, the role of central banks in climate governance has intensified debates surrounding central bank independence (CBI). Informed by elite interviews with UK monetary policy experts and a discourse analysis of Bank of England reports, this article reveals the internal views on repoliticisation of the Bank and CBI catalysed by the mandate to ‘facilitate the transition to net zero’. We find different interpretations of CBI that are shaped by perceptions of the Bank’s existing political status, with some claiming that the Bank is intrinsically apolitical and immune to repoliticisation and others viewing CBI as fragile or a strategically-deployed discourse. Across three distinct views of politics, and by extensions CBI, we identify dual dynamics of depoliticisation and re-politicisation that serve to legitimate and depoliticise prior mission creep whilst simultaneously licencing politicising debates on the bank’s institutional evolution. We demonstrate that the Bank of England is an indispensable case study in the green central banking literature for understanding the political economy of CBI within the context of climate change.

Does Central Bank Independence Reduce Economic Vulnerability in Africa?

Does Central Bank Independence Reduce Economic Vulnerability in Africa?

Green Monetary Policy Measures and Central Bank Mandates: A Comparative Political Economy Analysis

Climate change and the political pressure for urgent policy responses have stirred an intense debate as to whether central banks should adjust their monetary policy frameworks in support of the transition to a greener economy. Despite the seriousness of environmental issues and the seeming existence of monetary policy tools to address them, some economists and central bank officials argue that monetary authorities cannot, or should not, be responsible for making policies that act upon the source of those problems. Among other reasons, the adoption of green monetary policy measures can conflict with the primary monetary policy goals, compromise the political independence of central banks, and raise questions about the legitimacy and increased power of some of these banks. Yet, evidence shows that a number of monetary authorities have already adopted environmental criteria in their policymaking, resulting in an expansion of monetary policy toolkits and areas of responsibility. This article undertakes a comparative political economy analysis of the green monetary policy measures and legal mandates of 20 central banks, covering the period between January 2010 and January 2024. This article then examines the monetary policy decisions of two case study central banks, whose green strategies appear not to be fully aligned with their mandates. The empirical findings aim to contribute to the growing political economy literature and international debate on how central banks address pressures related to environmental concerns which, although vital to society and the planet, may pose challenges to conventional goals and established mandates.

The Repo Market and Conflict Inflation

This article seeks to connect today's inflation with one of the least studied and understood creations of the Federal Reserve - the repurchase (repo) market. Despite decades of existence, it is only in the last few years that the repo market has ceased to function smoothly, experiencing first a moment of crisis followed by one of great profitability. When functioning properly, the repo market went virtually unnoticed. Now that it is not, the market has gained the attention of mainstream economics as well as policy makers. However, conventional academic analysis is limited and cannot fully capture the effects that the repo market has had on the overall economy. In this article, we argue that the causes of the pandemic inflation and its public policy response can be understood as the culmination of the longer term currents of globalized financialization and central bank independence. To sharpen our focus on the shorter term, we construct upon the heterodox position of conflict inflation, and argue that the repo market and its principle actors should be considered within the discussion.

Central Bank Independence at Low Interest Rates

Central Bank Independence at Low Interest Rates

Exploring the Relationships Between Democracy and Central Bank Independence:

Exploring the Relationships Between Democracy and Central Bank Independence:

Central Bank Independence and Inflation in Latin America—Through the Lens of History

AbstractWe study the link between central bank independence and inflation by providing narrative and empirical evidence based on Latin America's historical experience. Using a novel historical data set of central bank independence for 17 Latin American countries, we recount the rocky journey traveled by central banks to achieve independence and price stability. Our empirical analysis finds a strong negative association between central bank independence and inflation over the last 80 years, with improvements in independence resulting in a steady decline in inflation. Results are robust to endogeneity concerns and to using alternative central bank independence indices.

Central bank communication: Inflation target transparency with fiscal policy

AbstractThis article examines the impact of opacity in announcing the central bank's inflation target on macroeconomic volatility and welfare, considering the interaction between an independent central bank and a fiscal authority. Our findings suggest that a key factor influencing the effects of central bank transparency is the relative importance placed by the central bank, compared to the government, on output stabilization versus inflation stabilization. Specifically, when output stabilization is relatively more important for the central bank than for the government, full opacity may benefit the central bank, but not necessarily society as a whole.

Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States

Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States

Central Bank Independence and Inflation Under Asymmetric Information: Delegation vs. Seesaw Effects

Abstract Recent empirical research finds little or mixed evidence in favour of a negative relationship between central bank independence and inflation. In this paper, we construct a theory where the relationship between inflation and central bank independence depends on the extent of informational asymmetry regarding the government’s efficiency in its provision of public goods and also provide some empirical support for it. In the theoretical part of the paper, we introduce the degree of central bank independence as a fixed cost that is paid when the government (whose objective is to minimize output gap via inflation or costly fiscal expansion) rejects the monetary policy proposal of the central bank (which aims to minimize inflation) and determines both fiscal and monetary policies itself. Government efficiency in providing public goods, i.e. the cost of fiscal expansion, is the private information and the source of informational asymmetry in our model. In this setting, increasing the fixed cost of rejecting the central bank’s offer creates two opposite effects on inflation: delegation effect and seesaw effect (since fiscal and monetary expansion are substitutes for the government, now it relies more on fiscal expansion). We show that while the magnitude of the delegation effect is equal to or higher than the seesaw effect, the magnitude of each effect depends on the current level of the fixed cost. If the current fixed cost is not high enough, then a small improvement in central bank independence creates a relatively smaller delegation effect compared to the case where fixed cost is high enough and both efficient and inefficient government types accept the offer.

To What Extent Does Central Bank Independence Alleviate Poverty in Developing Countries?

Abstract This paper investigates the nexus between poverty and central bank independence in developing countries. The study examines data from up to 35 developing countries from 2000 to 2018. Using the GMM dynamic panel data method, the study finds that de jure central bank independence is more robust than de facto in reducing inflation. However, the effect of de facto central bank independence is significant in reducing poverty, while de jure central bank independence is not. The paper concludes that central bank independence may play a role in managing inflation in developing countries with high inflation and could relatively contribute to poverty reduction in these countries.

CENTRAL BANK INDEPENDENCE, INFLATION AND VOLATILITY NEXUS: DOES INDEPENDENCE CAN SOLVE INFLATION?

In this study, the relationship between central bank independence and both inflation rate and inflation uncertainty is examined with the help of panel data analysis for BRICS-T countries, using data for the period 1995-2017. The findings reveal several notable results. First, the study finds a statistically significant and negative relationship between the level of central bank independence and inflation in BRICS-T countries. Consequently, this means that a higher degree of independence is associated with lower inflation rates. Additionally, the study reveals a statistically significant and positive relationship between central bank independence and inflation uncertainty. This shows that inflation uncertainty tends to increase as the level of independence increases. These results shed light on the complex dynamics between central bank independence, inflation, and inflation uncertainty, providing valuable information for policymakers, central banks, and researchers interested in monetary policy effectiveness and macroeconomic stability. It is recommended that future studies investigate the underlying mechanisms driving these relationships and evaluate potential differences across countries and time periods

In Defense of Central Bank Independence against its Enthusiasts

The problem of time inconsistency provides the basic economic rationale behind the independence of central banks, understood as the most suitable institutional mechanism for ensuring price stability. According to the consensus that emerged in the 1990s and the 2000s, endowing the central bank with independent decision-making authority over the use of monetary policy instruments, with a mandate for price stability, enhances the effectiveness of monetary policy and reduces the inflation volatility. It may be surprising that criticisms of the once almost sacrosanct independence arise after the Great Financial Crisis, when it is widely recognized that central banks “saved the world” from repeating the Great Depression of the 1930s. The paper is an attempt to explain the rationale why these cracks in the consensus have arisen and offers suggestions what to do about it. Independence has an economic basis that is as solid as its political foundation is fragile, because central banks are unelected power. And in the realm of economics and politics, the political economy of central banking may help us understand the evolution of the degree and the specific form of independence because of both internal and external political and economic constraints. The paper examines these issues in some detail, to contextualize the economic and non-economic threats to independence and discusses possible mitigants. Properly assessing the challenges is a prerequisite for preserving the value of this institution, which is perhaps the most important and effective institutional innovation of our time in macroeconomic policy.

Determinants of the choice of exchange rate regime in oil-exporting countries

This study examines the factors that determine exchange rate regime choice in oil-exporting countries. We run ordered logit regressions for an unbalanced panel dataset of 138 countries covering 1974–2021 and confirm that oil-exporting countries are more likely to adopt a fixed exchange rate regime than other countries. The main reason for this is that, given the volatility and uncertainty of oil revenues, traditional monetary policy tools are ineffective, resulting in the exchange rate serving as a nominal anchor. This is supported by our findings on the distinct roles of output volatility, government spending, fiscal cyclicality, and central bank independence in determining exchange rate regimes in oil-exporting countries.

Does an Independent Central Bank Smooth Exchange Rate Volatility? Evidence from Time-Varying Panel Causality Analysis

Abstract This paper empirically examines the effect of the central banks independence on exchange rate volatility by using a large data-set for the E7 (7 emerging countries) covering the period 1998-2017. This paper applies the time-varying panel causality analysis to obtain country-based results. The results show that the policy design, with relatively independent central banks, provides supportive results for macroeconomic stability. It is concluded that policies focusing on current problems by ignoring macroeconomic stability, such as the 2008 crisis, have eliminated the relationship between bank independence and stability.

Transparency in Central Bank and Credit Expansion: Empirical Evidence from Asian Countries

Abstract This research investigated the influence of central bank transparency on credit expansion in 15 Asian nations (both advanced and emerging) during the period from 2000 to 2019. Panel OLS and Dynamic GMM estimation are used to identify the impact of central bank transparency on the credit spread. The findings indicate that central bank transparency plays a crucial role in lowering credit spreads and facilitating credit expansion. In addition, the influence of central bank transparency on credit spreads has a greater effect in emerging economies than in developed economies, highlighting the significance of transparency for tackling information asymmetry within the credit system. Overall, the research highlights the significance of central bank independence in reducing knowledge disparities and promoting a more transparent credit environment.

Central bank independence, income inequality and poverty: What do the data say?

Central bank independence, income inequality and poverty: What do the data say?

Central Bank Independence: Views from History and Machine Learning

We assemble an almost complete set of central bank statutes since 1800 to assess the legal independence of central banking institutions. We use these to extend existing indices of legal independence backward and forward in time. We document the trend toward increased independence post 1980 as well as an earlier, more limited movement in the direction of enhanced independence in the 1920s. We apply natural language processing to current statutes to corroborate our human-reader assessment. Using machine-learning methods, we quantify the extent to which topics in those statutes contribute to the independence measure based on our reading of the statutes. The topic with the largest positive contribution to explaining the cross-country variation in central bank independence encompasses disclosure, transparency, and reporting obligations. The topic with the largest negative contribution covers regulatory powers over inter alia securities markets that complicate the central bank's mandate, make accountability more complex, and render independence problematic.

Uncovering the (Possible) Relationship between Central Bank Independence and Economic Growth in the Context of Monetary Unions

Abstract This work estimates the relationship between Central Bank Independence (CBI) and economic growth in the context of monetary unions, using dynamic panel models. We use two measures of CBI: the Legal CBI index and the irregular turnover rate. When an irregular turnover of the Central Bank Governor occurs, it harms growth for countries outside monetary unions. On the contrary, the Legal CBI index is a positive factor for growth, although only regarding countries belonging to monetary unions. The limitations on lending to the government is the most important component of the Legal CBI, which explains this result. Additionally, we analyse sub-samples taking into account the level of income, the number of crises, the existence of quantitative easing policies, and different time windows. Interestingly, 1990–2013 was a harmful period for growth for the entire sample but benign for countries that belong to monetary unions. Moreover, when countries are in a crisis they benefit from being a member of a monetary union with an independent central bank. Results seem to point to the conclusion that Legal CBI in a monetary union has the potential to increase economic growth rates. (JEL codes: C23, E58, and O43)

The impact of Reserve Bank of India officials' resignations on financial sector returns: An event-study analysis

In this study, we examine the short-term effects of the resignations of high-ranking officials from the Reserve Bank of India (RBI) on financial sector returns. We apply a commonly used event-study method to analyze financial sector stocks during the period from February 16, 2018, to July 22, 2019. The findings reveal that the financial sector was sensitive to the resignations of RBI Governor Urjit Patel and Deputy Governor Viral Acharya, both strong supporters of the RBI's independence. Patel’s resignation caused a significant negative impact on cumulative abnormal returns, while Acharya’s resignation led to a significant positive impact on these returns. Our results suggest that central bank independence (CBI) may have varied short-term effects on financial sector performance. It is, therefore, important for both politicians and investors to understand the implications of our findings in order to fully grasp the political and economic consequences of central bank independence and the credibility of monetary policy on financial sector outcomes. For future research, we suggest exploring the effects of these resignations on other financial indicators, such as bond yields, exchange rates, and interest rates, using alternative methods.