Greater Central Bank Independence Research Articles

Revisiting the institutional determinants of central bank independence

ABSTRACTReform towards greater central bank independence is generally seen as intertwined with institutional development more broadly. However, the largest empirical study to date on the determinants of central bank independence found a negative relationship to institutional quality variables. This paper argues that this is related to sample length: using a different dataset for central bank independence with a considerably longer sample, institutional variables are found to be positive and highly significant determinants of central bank independence.

Monetary and Fiscal Policies and the Dynamics of the Yield Curve in Morocco

We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.

Monetary and Fiscal Policies and the Dynamics of the Yield Curve in Morocco

We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.

Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries

This paper measures sacrifice ratios for all countries in the world over an approximately forty year time period, in addition to exploring the determinants of worldwide sacrifice ratios. We test the most commonly-cited determinants: the speed of disinflation, openness, inflation targeting, central bank independence, and political factors for both OECD and non-OECD countries. We find that the speed of disinflation is the most important determinant of OECD sacrifice ratios, but puzzlingly has no effect on non-OECD nations' disinflation costs. Instead we find evidence that greater central bank independence and more openness are associated with lower non-OECD sacrifice ratios. We also find that the ratio of government debt to GDP – a variable that is not important when it comes to OECD countries – is highly significant for non-OECD economies. Specifically, we find that higher indebtedness is associated with lower sacrifice ratios in non-OECD nations, suggesting that greater levels of debt do not lead to higher expectations of inflation. Furthermore we find evidence that the negative impact of debt on non-OECD sacrifice ratios is being driven by middle income economies.

Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey

Turkey experienced a financial crisis in 2000–2001, which led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy's output effects have been strengthened considerably by the reforms. In the pre-crisis period, monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy.

Does greater central bank independence really lead to lower inflation? Evidence from panel data

It has long been held that central bank independence (CBI) from political control is a necessary requirement to curb inflation. In recent times, however, this long held belief has been challenged. Using a recently compiled panel data set on central bank independence measures, the proposition that greater CBI leads to lower inflation is tested, using latent variable analysis. The use of this alternative econometric technique, along with two additional indicators that capture more appropriately the degree of de facto independence, leads to empirical results that are highly supportive of the negative relationship between CBI and inflation, thereby restoring faith in the conventionally held wisdom, that greater CBI is needed to lower inflation.

Institutional structures of financial sector supervision, their drivers and historical benchmarks

This paper studies institutional structures of prudential and business conduct supervision of financial services in 98 high and middle income countries over the past decade. It identifies possible drivers of changes in these supervisory structures using the panel ordered probit analysis. The results show that (i) more developed, small open economies with better public governance tend to integrate their supervision, especially the prudential one; (ii) more financially developed countries integrate more their supervision; however, greater development of the non-bank financial system leads to less integrated prudential supervision but not business conduct supervision; (iii) the lobbying power of concentrated and highly profitable banking sectors significant hinders business conduct integration; (vi) countries that experienced financial crises integrate their supervisory structure relatively more and (v) greater central bank independence could cause less integration of prudential supervision, but not necessarily of business conduct supervision.

Central bank independence and its effect on money market stability

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.

Foreign exchange intervention and central bank independence: the Latin American experience

Employing data from 13 Latin American countries, we find that greater central bank independence is associated with lesser intervention in the foreign exchange market, and also with leaning-against-...

Central Bank Independence and Transparency: Evolution and Effectiveness

While central banks have existed since the seventeenth century, their purpose, functions, and operations have evolved over time. Over the past two decades, the pace of reforms in terms of institutional independence and transparency has been particularly brisk. This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. The legal independence of central banks (measured using an index first constructed by Cukierman, Webb, and Neyapti, 1992) has increased markedly since the 1980s, while the rise in transparency since the late 1990s (measured using an index based upon the work of Eijffinger and Geraats, 2006) has been less impressive. Increases in CBI have tended to occur in more democratic countries and in countries with high levels of past inflation. More independent central banks in turn tend to be more transparent, while transparency is also positively correlated with measures of national institutional quality. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present robust evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank, consistent with a simple signal extraction model in which the public signal becomes more precise as our transparency measure increases.

Central bank independence and transparency: Evolution and effectiveness

Over the past two decades, the pace of central bank reforms in terms of institutional independence and transparency has been particularly brisk. This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. The legal independence of central banks has increased markedly since the 1980s, while the rise in transparency since the late 1990s has been less impressive. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present robust evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank.

Central Bank Independence and Transparency: Evolution and Effectiveness

While central banks have existed since the seventeenth century, their purpose, functions, and operations have evolved over time. Over the past two decades, the pace of reforms in terms of institutional independence and transparency has been particularly brisk. This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. The legal independence of central banks (measured using an index first constructed by Cukierman, Webb, and Neyapti, 1992) has increased markedly since the 1980s, particularly for emerging market and developing countries, while the rise in transparency since the late 1990s (measured using an index based upon the work of Eijffinger and Geraats, 2006) has been less impressive. Increases in CBI have tended to occur in more democratic countries and in countries with high levels of past inflation. More independent central banks in turn tend to be more transparent, while transparency is also positively correlated with measures of national institutional quality. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present robust evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank, consistent with a simple signal extraction model in which the public signal becomes more precise as our transparency measure increases.

Central Bank Independence and Transparency: Evolution and Effectiveness

This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. Increases in CBI have tended to occur in more democratic countries and in countries with high levels of past inflation. More independent central banks in turn tend to be more transparent, while transparency is also positively correlated with measures of national institutional quality. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank.

The Evolution of Central Bank Governance around the World

The past two decades have seen enormous changes in central banks and their practices. In some countries, older institutions have been fundamentally restructured. In other, such as the countries of the former Soviet Union, entirely new central banks have been established. The member countries of the European Union have created a supranational central bank that oversees a monetary union. In all of these situations, central bank law was either revised or written de novo, while institutional objectives, practices, and structures were amended or created from scratch. In this article, we survey and quantify the trends in two major areas of central bank governance: independence and transparency. We document the steady progress toward greater central bank independence and transparency in a large number of industrial and developing countries over the past 10 to 15 years and discuss the effects of these aspects of governance on inflation. Finally, we touch on committee structure and decision making.

Communication and Monetary Policy

Recent trends toward greater central bank independence and the adoption of formal inflation targeting by several countries have served to emphasize the importance of communication policy. In this paper, we explore some of the economic effects of public information that arise whenever public information serves the dual role of conveying fundamental information as well as serving as a focal point for better coordination. More precise public information is a double‐edged tool. While it is very effective in influencing actions through coordination, sometimes it can be too effective, and coordinate actions away from fundamentals.

EU各国における中央銀行の独立性とインフレーション, 産出量

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.

Democratic accountability and central bank independence: Historical and contemporary, national and European perspectives

Recently there has been a general move towards greater central bank independence in Europe. Countries such as Belgium, Britain, France and Spain have all increased the autonomy of their respective central banks. In this context, some people have argued that the prospects for democratic, representative government have been weakened. In these countries, democratically elected governments can no longer control the process of monetary policy making. By constructing an index of central banks’ independence, this article shows that the recent moves towards central bank independence in Britain and France have not challenged the basic foundations of indirect political accountability. However, it also shows that the proposed institutional architecture of the European Central Bank is a departure from the norms of political accountability and that, in this case, there is a distinct ‘democratic deficit’ which needs to be addressed.

Mixed Signals: Central Bank Independence, Coordinated Wage Bargaining, and European Monetary Union

Plans for the European Monetary Union (EMU) are based on the conventional postulate that increasing the independence of the central bank can reduce inflation without any real economic effects. However, the theoretical and empirical bases for this claim rest on models of the economy that make unrealistic information assumptions and omit institutional variables other than the central bank. When signaling problems between the central bank and other actors in the political economy are considered, we find that the character of wage bargaining conditions the impact of central bank independence by rendering the signals between the bank and the bargainers more or less effective. Greater central bank independence can reduce inflation without major employment effects where bargaining is coordinated, but it can bring higher levels of unemployment where bargaining is less coordinated. Thus, currency unions like the EMU may require higher levels of unemployment to control inflation than their proponents envisage. They will have costs as well as benefits, and these will be unevenly distributed among and within the member nations, depending on the changes they induce in the status of the bank and of wage coordination.

CENTRAL BANK INDEPENDENCE, WAGE-BARGAINING STRUCTURE, AND MACROECONOMIC PERFORMANCE IN OECD COUNTRIES

The impact of central bank independence and wage-bargaining structure on inflation and unemployment is explored theoretically and tested empirically for a sample of 17 OECD countries over two separate periods. The results suggest that inflation is lower in economies with greater central bank independence and that the equilibrium unemployment rate depends on the structure of the labour market. Greater central bank independence does not appear to be associated with higher unemployment. IN RECENT years the issue of central bank independence and its impact on the conduct of macroeconomic policy has been much discussed. Theoretically, the work of Rogoff (1985) was seminal. Rogoff argued that governments had an incentive to appoint 'conservative' central bankers (i.e., ones with an anti-inflationary bias) in order to bolster the authorities' anti-inflation