Central Bank Independence Research Articles

INDEPENDENCE OF CENTRAL BANK: NEW CHALLENGES

Abstract. The studydeals with determining the status of central banks and their formal independence in the context of the index approach. The authors argue that there is an inverse relationship between inflation and the level of independence of central banks. It turned out that the expansion of powers of the central bank based on the GMT-index shows a lower level of independence. The authors conducted a quantitative study of the elements of the index of independence of central banks. The peculiarities of formulating the central bank's mandate, procedures for agreeing goals, appointing management and duration of its stay in an office, ability to choose and apply monetary instruments, procedures for covering operating costs of the central bank and transferring profits to the budget, correct interpretation of legislation are identified. The problems of the index approach are the interpretation of the central bank's mandate, the density of the relationship between indices and inflation rates, as well as the quantification of legislation. To eliminate the shortcomings of the basic index approach, alternative approaches are proposed, in particular, the index of constitutional independence, the TOR index and the index of political vulnerability of the management. Extrapolating the index approach for developed countries does not always work when the sampling expands to include emerging market countries. Particularlyin countries with weak institutions, the de facto independence of the central bank does not always correspond to the formal one. For example, in Ukraine, asserting the consistency of the relationship between the inflation rate and the level of formal independence is quite complicated. Particular attention is paid to the problem of opposition to the political and economic independence of the central bank. The originality of the article is due to the need to identify new challenges to the independence of monetary authorities due to macroeconomic and institutional factors that lead to imbalances between the status of central banks and the consolidation of monetary objectives (instruments) at the legislative level to achieve price stability. Keywords: central bank, economic independence, quality of institutes, GMT-index, political power. JEL Classification G21 Formulas: 0; fig.: 2; tabl.: 0; bibl.: 19.

Simon Mee, Central Bank Independence and the Legacy of the German Past, Cambridge University Press, Cambridge 2019, 368 pp. £ 75,00.

Article Simon Mee, Central Bank Independence and the Legacy of the German Past, Cambridge University Press, Cambridge 2019, 368 pp. £ 75,00. was published on September 1, 2021 in the journal Zeitschrift für Unternehmensgeschichte (volume 66, issue 2).

Central Bank Independence: A Pseudo de Facto Case of Reserve Bank of India

The trend of studies dealing with the correlation between central bank independence and inflation rose to prominence in the last twentieth century, 1980’s. These phenomena lead to development of certain empirical indices for measuring CBI across the countries. This study tries to evaluate the central bank independence in India using the index modelled on the lines of Jasmine Mona and Talla with minor modification regarding price stability objective. The study covers the time period from 1990–1991 till 2018–2019. The results found were that CBI has in India has more or less increased but improved significantly since the adoption of inflation targeting and formation of monetary policy committee post 2016.

The public, the private and the secret: Thoughts on privacy in central bank digital currencies

This paper discusses the issues surrounding privacy and anonymity in the context of central bank digital currency (CBDC). Most notably, central banks calibrating the design criteria for CBDC must strike a balance between data protection and the individual’s right to privacy on the one hand, and the prevention of financial crime on the other. In this regard, there are — from a technical and governance point of view — a number of possible solutions. By way of illustration, this paper constructs three exemplary and simplified privacy scenarios. The paper also describes the need for standards to ensure the responsible treatment of data, and clear rules guaranteeing that access is restricted to public authorities fulfilling their mandates. When it comes to protecting user privacy in a CBDC system, this paper argues that independent central banks are ideally positioned to serve as an honest broker. In this respect, gaining the public’s trust and acceptance will be a key challenge for central banks.

Inflation and Real Measure of Central Bank Independence in Tunisia

Inflation and Real Measure of Central Bank Independence in Tunisia

The German Federal Constitutional Court Ruling and the European Central Bank’s Strategy

ABSTRACT The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de facto independence of the European Central Bank (ECB). This article shows how a regular proportionality check could be integrated in the ECB’s strategy, which is currently undergoing a systematic review. In particular, it proposes that quantitative benchmarks for policy rates and the central bank balance sheet should be included. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.

Financial Globalization, Output Gap and Foreign Output Gap on inflation: Evidenced from Developing Economies

This paper covers previous studies' deficiencies and re-examine the theoretical model using a heterogeneous panel GMM technique, which overcomes cross-section dependency. In the current sample of developing nations, developed two models'; model 1 consists of the domestic output gap, and the second model includes the foreign output gap. According to model 1, foreign globalization and imports boost the inflation level in developing countries and disaggregation analysis (low, lower-middle, and upper-middle-income countries). The output gap impedes inflation in overall, lower-middle, and upper-middle-income countries, while it boosts inflation in low-income nations. And unemployment level increases the inflation rate in the overall and middle-income groups, while in low- and high-income countries, it decreases. According to the second model, foreign globalization and the foreign output gap boost overall low-income, middle-income, and upper-middle-income groups. While import reduces the inflation level globally, while in low-income, middle-income, and upper-middle-income groups, it increases inflation. Finally, the unemployment level boosts the global inflation level and as well as in low income, and it impedes inflation rate in upper-middle-income group. Despite this, there is considerable variation in countries' effect, perhaps due to differences in political institutions' quality, central bank independence, exchange rate systems, financial development, and legal traditions.

Estimating the effect of central bank independence on inflation using longitudinal targeted maximum likelihood estimation

Abstract The notion that an independent central bank reduces a country’s inflation is a controversial hypothesis. To date, it has not been possible to satisfactorily answer this question because the complex macroeconomic structure that gives rise to the data has not been adequately incorporated into statistical analyses. We develop a causal model that summarizes the economic process of inflation. Based on this causal model and recent data, we discuss and identify the assumptions under which the effect of central bank independence on inflation can be identified and estimated. Given these and alternative assumptions, we estimate this effect using modern doubly robust effect estimators, i.e., longitudinal targeted maximum likelihood estimators. The estimation procedure incorporates machine learning algorithms and is tailored to address the challenges associated with complex longitudinal macroeconomic data. We do not find strong support for the hypothesis that having an independent central bank for a long period of time necessarily lowers inflation. Simulation studies evaluate the sensitivity of the proposed methods in complex settings when certain assumptions are violated and highlight the importance of working with appropriate learning algorithms for estimation.

Sovereign risk spill-overs in the banking sectors of Central America and the Caribbean

This paper examines the relationship between sovereign credit ratings and bank stability in Central America and the Caribbean (CAC). We use data on 177 banks from 24 countries for the period 1999–2014 and find that sovereign rating downgrades precede deterioration in bank stability. The finding highlights the importance of understanding the transmission channels and the amplification of sovereign risk spill-overs. With respect to the former, we found evidence to support both the “balance sheet exposure” and “asset valuation adjustments” arguments found in the literature. Concerning the latter, the sovereign risk spill-overs are more intense in countries with low foreign currency reserves, limited financial transparency and weak central bank independence. Our findings support the argument that banks are vulnerable to the aggravation of sovereign risk concerns and thus, the zero risk weight to sovereigns should be reviewed.

Designing the fiscal-monetary nexus: policy options for the EU

In recent decades, and in particular since the shift towards independent central banks, there has been no explicit coordination of fiscal and monetary policy. In the Eurozone, this lack of coordination represents an important flaw, especially since the Eurozone is not an optimal currency area. Complementing monetary union with a transfer union represents one possible solution. This paper argues that the negative impact of post-2008 and post-Covid-19 unconventional monetary policy on income inequalities provides a second reason to coordinate fiscal and monetary policy. Among various institutional arrangements to implement such coordination, the paper defends the idea that the European Central Bank should be sensitive to distributive considerations when formulating its monetary policy. Such an arrangement would help both to contain the distributive side-effects of monetary policy and to at least partially remedy the flaw at the heart of the Eurozone as long as an outright transfer union remains unfeasible.

Mesure de l’évolution de l’indépendance légale de Bank AL Maghreb selon indice de Jâcome 2001

This article proposes to assess the degree of independence of Bank Al Maghrib (BAM), according to the index developed by Jacome (2001). The interest of this exercise emanates from an important observation: rare studies have evaluated the degree of independence of BAM after the entry into force of the statutes of 2006 (law 70-05) and the Moroccan central bank has changed. A second time its statutes in 2019 (law 40-17). To assess the degree of jury independence of BAM, we will use the index developed by Jacome (2001). This index is based on 10 variables, key to the independence of central banks, and the weight of each variable depends on its importance for the autonomy of central banks and the conduct of monetary policies. The results obtained show that the degree of independence of BAM has increased considerably with the statutes of 2006 (law 76-03) and that the statutes of 2019 have consolidated this important degree of independence by deepening it further. However, the results obtained remain to be qualified and completed by evaluating the de facto independence of BAM, because the interest of jury independence depends on its translation into the facts which itself depends on several factors in particular the degree of respect for the law in a society

Disentangling the sources of inflation synchronization. Evidence from a large panel dataset

What affects inflation synchronization? To answer this question I employ a two-step approach. First, with the means of dynamic conditional correlations I quantify time-varying price co-movements. Second, I disentangle their sources using panel regressions on a heterogeneous sample of countries. Estimation results indicate that various factors affects inflation synchronization, both in time and across advanced, emerging and least developed economies. Price co-movements tend to strengthen along the unification of monetary policy frameworks, the falling independence of central banks and due to the unconventional monetary policy by the Federal Reserve. Large variations in oil prices affect markedly inflation synchronization, except for low-income countries for which changes in the degree of exchange rate rigidity, the level of inflation and country's development explain the bulk of the variation in price co-movements. Inflation synchronization also intensifies with rising trade tensions, especially in emerging economies, whereas for the UE economies increased synchronization in business cycles as well as recent disinflationary pressures also strengthen price co-movements to some extent.

Two Major Economic Crises in the Early Twenty-First Century and their Impact on Central Bank Independence

Abstract Two major economic crises in the early twenty-first century have had a serious impact on monetary policy and CB independence. Disruption in financial intermediation and associated deflationary pressures caused by the global financial crisis of 2007–2009 and European financial crisis of 2010–2015 pushed central banks (CBs) in major currency areas towards adoption of unconventional monetary policy measures, including large-scale purchase of government bonds (quantitative easing). The same approach has been taken by CBs in response to the COVID-19 crisis in 2020 even if the characteristics of this crisis differ from the previous one. As a result of both crises, CBs have become major holders of government bonds and de facto – main creditors of governments. Against rapidly deteriorating fiscal balances, CBs have become hostages of fiscal policies, which compromises their independence. Risks to the CB independence also come from their additional mandates (beyond price stability) and populist political pressures.

Targeting inflation targeting: the influence of interest groups

We examine whether sectional interest groups influence monetary policy goals in a manner consistent with their interests as distributive coalitions. In particular, we explore whether bank groups and labor groups are associated with the incidence of inflation targeting by the central bank. Controlling for a variety of economic and institutional factors, our main findings reveal that bank groups are associated with a higher probability that a country is an inflation-targeter while labor groups are associated with a lower probability. The findings are conditional on the level of democracy and on aspects of central bank independence.

Economic policy responses to the COVID-19 pandemic: The role of central bank independence

Is central bank independence (CBI) associated with economic policy responses to mitigate the adverse economic effects of the COVID 19 pandemic? In this paper, we provide cross-country evidence that it does. Our results generally indicate that more independent monetary policy authorities have adopted smaller cuts in the policy rate and reserve requirements. However, fiscal and macro-financial packages are relatively larger in countries with more independent central banks. These results are robust to different sets of control variables and different econometric specifications that include an instrumental variable estimation.

Does communication influence executives’ opinion of central bank policy?☆

We analyze the economic impact of central banks sensed by business executives in a sample of 61 countries from 1998 to 2016. Based on a survey conducted by the Institute for Management Development (IMD), we find compelling evidence that intensive central bank communication, as measured by the quantity of speeches, worsens the perceived impact. During the global financial crisis (GFC), this effect became even stronger. In contrast, economic growth and a positive output gap improve the opinion executives have of their central bank’s impact on the economy. Moreover, although less robustly, higher unemployment, and higher short-term interest rates worsen executives’ opinion, while market uncertainty improves it. The level of inflation and an inflation targeting regime, central bank independence and transparency, financial crises, the zero lower bound constraint, forward guidance, the performance of the stock market, and the volatility of the exchange rate seem to be unimportant in this regard. A more detailed analysis shows that the effect of speeches depends on the identity of the speaker, the exchange-rate regime or an explicit employment mandate.

Central bank independence, a not so new idea in the history of economic thought: a doctrine in the 1920s

Central bank independence (CBI) has been a prominent topic for decades, but remains relatively unexplored in the history of economic thought. Relevant literature is scarce and focuses on the post-war period. To extend this literature, I argue that there was a doctrine of CBI in the 1920s. I examine its development from an international recommendation and a principle of the central banking doctrine designed by the British governor Norman to the elaborate doctrine of Kisch & Elkin. The paper’s main contribution is a detailed analysis of the doctrine of CBI provided in their reference book on central banking.

Готовність до запровадження цифрової валюти: чи є важливою незалежність центробанків?

The paper put forward the hypothesis suggesting that central bank’s advances on the way of CBDC projects depend on the level of their independence. At the same time, the theory demonstrates some ambiguity of how to interpret independence in respect of CBDC involvement especially in the case of empirical tests because indexes of central banks independence are tailored to the assessment of relations between monetary authorities’ status and inflation. A high level of the central bank independence index rank may mean a narrow focus on monetary policy, while a low level of independence may mean a lack of resources to be allocated to execute the innovative projects. To avoid such theoretic ambiguity in the empirical test the linearly and quadratic functions are applied in the case of the central bank independence proxy. Such proxy is added by proxies for economic development, innovations and financial development. The role of political regimes is also examined. The empirical results show that the intermediate central banks independence level might play the role in how deeply central banks are plunged in CBDC projects. The Intermediate level is interpreted as a situation when central banks operate with enough financial independence to realize innovative projects but scope of responsibilities goes beyond a narrow focus on monetary policy. But central banks status proxy is valid in the multivariate regression. The most statistically significant driver of advances toward CBDC is financial development. Proxy for innovations is valid only in the univariate regression. In the case of multivariate regression the innovation capacity of the country is less important than financial development and central bank’s status.

Central bank independence, fiscal deficits and currency union: Lessons from Africa

Can central bank independence (CBI) help to reduce fiscal balances? In this paper, we answer this question using novel measures of CBI based on the turnover rate of central bank governors (TOR) and the Garriga measure of legal independence for 30 African countries for the period 1990–2017. Our novel measures of CBI capture the degree of alliance between the fiscal authority and the monetary authority which can potentially lead to debt monetization and higher fiscal balances. Thus, we classify central bank governor changes into ally changes or non-ally changes; in addition to that, we decompose our full sample into CFA zone countries and non-CFA zone countries to capture the effect of currency union membership. Our results show that for CFA zone countries, central bank autonomy, when proxied by the turnover rate of central bank governors, is associated with a decrease in fiscal balances and replacing a central banker with a non-ally, is negatively and significantly associated with fiscal balances.

Political Attitudes and Inflation Expectations: Evidence and Implications

AbstractWe show that for the United States and Australia consumers expect significantly lower inflation when the political party they support holds executive office. This finding cannot be explained by previously documented sources of heterogeneity in consumer inflation expectations. It is consistent with stereotypical thinking (Bordalo et al. 2016), pointing to the use of heuristics in the formation of macro‐economic beliefs. Our findings have implications for consumers' understanding of central bank independence and its connection with inflation stabilization.