Central Bank Independence Research Articles

Remarks on Johan van der Walt’s Concept of Liberal Democratic Law

This article engages with Van der Walt’s concept of liberal democratic law. Firstly, it shows that his concept is significantly influenced by Hans Kelsen’s theory, mainly by Kelsen’s democratic political theory but also by Kelsen’s legal theory (insofar as the latter is considered to be related to the former). Secondly, it demonstrates that he goes also beyond Kelsen’s theory by considering necessary for the sustainability of liberal democratic law an adequate social state. Given this, I argue that there is, to an extent, a proximity to Hermann Heller’s social Rechtsstaat theory. Thirdly, it shows that – although the socio-economic level is, to an extent, considered – he leaves unexplored the rise of independent technocratic institutions in the economic governance framework of contemporary liberal democracies (the independent central banks, like the European Central Bank, being the main example). I argue that this issue needs to be explored in order to reach a realistic understanding of liberal democratic law (an understanding that Van der Walt aims at).

The Democratic Challenge of Central Bank Credit Policies

Abstract This article provides a framework for understanding the economic role of central banks and their democratic legitimacy. I argue that thinking about the democratic challenges of central banking requires considering central banks’ insurance role and how their actions are part of credit policy. The contract between the central bank and the sovereign is incomplete because it cannot integrate all unforeseen contingencies, distributive consequences and interactions with other policies. This opens the door to viewing the legitimacy of central bank decisions through a process of deliberation, coordination and reflexivity, rather than only a delegation of power. I discuss a proposal for a European Credit Council, which would be a deliberative body aimed at strengthening Parliamentary power on monetary and credit policies, the democratic legitimacy of central bank policy in the Euro Area as well as its coordination with other European policies. More coordination, Parliamentary power and deliberation are consistent with central bank independence and aim to delimit more precisely the action of central banks within the macroeconomic and credit policies of the State.

The Power of Coordination and Deliberation

Abstract I provide comments and replies to the seven insightful contributions that discussed “The Democratic Challenge of Central Bank Credit Policies” and the proposal for a European Credit Council. I review how interdisciplinary scholarship on the political economy of central banking have shown the limits of simple principal-agent framework applied to central bank power and legitimacy. I emphasize why a change to central bank independence is not necessary for a fundamental change in the financial system and credit policies. I also argue that deliberations can have strong effects on decision-making and that the power of the people is not restricted to the legislative power.

Should the monetary authorities be sensitive to inequality concerns? Empirical evidence for a panel of 62 countries

PurposeThis paper aims to study, by means of an empirical approach, how monetary policy might affect the distribution of individual income.Design/methodology/approachAfter describing the channels through which monetary policy could impinge on income distribution, the authors carry out a panel analysis of 62 countries that control their monetary policy for the period 1996–2015.FindingsUsing two possible proxy variables for monetary policy (the monetary aggregate M3 and the real interest rates), the results reveal a significant positive relationship between real interest rates and income inequality measured through the market Gini coefficient and polarization ratios. The findings suggest that central bankers should be more aware of the redistributive effects of monetary policy.Research limitations/implicationsIt should be mentioned the major challenge of data limitation in the empirical investigation on the relationship between monetary policies and inequalities.Practical implicationsThe empirical evidence presented in this paper supports the premise that central bankers should not ignore the unintended redistributive consequences of their actions. In this regard, it is worth noting that if, in addition to price stability, central banks are also responsible for financial stability; the rationale behind central bank independence needs to be reconsidered.Originality/valueAn outstanding feature of the paper is its sample size and the variety of countries included in the sample, which includes countries from all continents and with very different levels of economic development. Also, unlike papers based on forecasting modeling – e.g. Vector autoregression (VAR) or Structural vector autoregression (SVAR) models, the study follows an explanatory approach, including not only monetary variables, but also a series of regressors that may have a meaningful and significant impact on inequality, according to a wide literature.

Threats to central bank independence and exchange rate volatility: High-frequency identification with Trump’s Fed tweets

This study presents market-based evidence that threats to central bank independence increase exchange rate volatility. We use Trump’s tweets that criticize the Fed’s monetary policies and advocate lower interest rates as a proxy for threats to central bank independence. We find that intraday exchange rate volatility rises following Trump’s Fed tweets. Moreover, this relation is more pronounced for the tweets with greater market attention and more negative sentiment. Our findings suggest that market participants do not perceive the Federal Reserve as independent from political pressure.

The push for financial inclusion in Africa: Should central banks be wary of political institutional quality and literacy rates?

AbstractMotivated by the literature on reform complementarities and their importance for the effectiveness of central bank independence (CBI) reforms—particularly for African countries—where CBI has empirically not been found to have a significant impact on financial development, we explore the extent to which differences in literacy levels and political institutions could determine the extent and impact of CBI on financial inclusion. Using panel data from 2004 to 2014, we find that, while CBI does not promote financial inclusion in Africa, financial literacy and political institutions do; even to the extent of enabling CBI's impact on financial inclusion. The results are robust to different measures of political institutions from Freedom House and Polity IV Database and present implications for the role governments could play in shepherding central banks in Africa in the midst of Africa's developmental challenges and the global crises.Related ArticlesAideyan, Osaore. 2016. “Political and Institutional Prerequisites for Monetary Union: Assessing Progress in the Economic Community of West African States (ECOWAS).” Politics & Policy 44(6): 1192–212. https://doi.org/10.1111/polp.12183.Asongu, Simplice A., Joseph Nnanna, and Vanessa S. Tchamyou. 2021. “Finance, Institutions, and Private Investment in Africa.” Politics & Policy 49(2): 309–51. https://doi.org/10.1111/polp.12395.Scarlato, Margherita, and Giorgio d'Agostino. 2019. “The Political Dimension of Cash Transfers in Latin America and Sub‐Saharan Africa: A Comparative Perspective.” Politics & Policy 47(6): 1125–55. https://doi.org/10.1111/polp.12332.

Bank lending behaviour and systemic banking crisis in Africa: The role of regulatory framework

AbstractWe examine how regulatory framework shapes the impact of bank lending behaviour on the probability of systemic banking crisis by using data from 52 African countries over the period 2006–2018. The study found that banks that lend beyond a certain level of threshold have the greater probability of causing a systemic banking crisis. The study provides empirical evidence in support of the argument that above average lending behaviour reduces the predicted probability of a systemic banking crisis in the presence of audit independence, at stringent–capital regulatory requirement, central bank independence and monetary policy framework.

Threats to central bank independence: High-frequency identification with twitter

A high-frequency approach is used to analyze the effects of President Trump’s tweets that criticize the Federal Reserve on financial markets. Identification exploits a short time window around the precise timestamp for each tweet. The average effect on the expected fed funds rate is negative and statistically significant, with the magnitude growing by horizon. The tweets also lead to an increase in stock prices and to a decrease in long-term U.S. Treasury yields. VAR evidence shows that the tweets had an important impact on actual monetary policy, the stock market, bond premia, and the macroeconomy.

The impact of governance quality on central bank’s independence

The stable functioning of the public finance system requires a rational regulatory apparatus. The central bank occupies a special place in this system. Science and practice prove that the central bank’s political and economic independence determines its effectiveness. Thus, it is crucial to determine the prerequisites for ensuring its independence. The study aims to assess the influence of governance quality on the central bank’s independence, considering the variance of the socio-political development of countries. The analysis was conducted based on 53 countries. Panel regression modeling with random effects was chosen as a research method. The analysis approach involves calculations for the groups of countries that differ in social and political development parameters according to the following criteria: the initial level of the central bank independence; level of human development; political rights freedom; level of civil liberties; and political regime. Socio-political factors significantly affect the central bank’s independence in the following conditions: a high initial level of independence of the central bank, a high level of human development, and an average level of political and civil freedom. At the same time, the governance quality ensures the growth of the central bank’s independence regardless of the countries’ political regime. Three factors have the most significant influence on ensuring the independence of the central bank, namely “government efficiency,” “quality of regulation,” and “rule of law.”

What type of central banker dampens the political business cycle? The case of Africa

AbstractThis article investigates the extent to which central bank independence can help to reduce political business cycles in Africa. Like previous studies, we find evidence of political cycles in our sample of 34 African countries for the period 1980–2018, but our findings show that politicians' ability to manipulate both fiscal and monetary policy depends on the degree of alliance between the fiscal authority and the monetary authority. Indeed, our analysis reveals that the political business cycle worsens when the central banker is an ally whereas a non‐ally central banker is associated with a decrease in the ability of the incumbent government to induce opportunistic political cycles, and this result holds, regardless of whether an African country is classified as a democracy or a dictatorship. In addition to that, despite the theoretical argument that political business cycles are unlikely to exist in dictatorships, we find evidence that both political budget and monetary cycles are prevalent in African dictatorships.

A critique of quantitative easing by the Federal Reserve System and the European Central Bank

The application of quantitative easing tools by certain central banks has been and continues to be the subject of professional debate. Therefore, this paper aims to assess an alternative scenario to the use of quantitative easing. We have used counterfactual analysis to estimate GDP growth in the US and in the Eurozone for the period during which quantitative easing was implemented, i.e., since 2009 in the US and since 2015 in the Eurozone. We used a vector autoregression (VAR) model for the analysis. We concluded that, in retrospect, the use of quantitative easing appears to be unwarranted. While there was slightly higher GDP growth in the Eurozone than there would have been without quantitative easing, there was no smoothing of the economic cycle. At the same time, returning to the inflation target took a relatively long time. In the US, quantitative easing prevented an initial slide into a deep recession and smoothed the economic cycle over the medium term. Overall, however, quantitative easing has mostly had a negative effect. One major negative is that when this instrument is used over a long time period, economic subjects gradually come to see it as a standard tool. Furthermore, inflation, central banks’ main objective, did not rise rapidly over the period in question; on the contrary, over the long term, quantitative easing has become one of the factors behind today’s higher inflation rates. An excessive monetary supply has created imbalances in the financial markets and has been a factor in price bubbles in the stock, bond, and property markets. Last but not least, it has increased moral hazard for governments, which have gone further into debt without difficulty. At the same time, central bank independence was violated, which has caused an abnormal increase in the central banks’ balance sheets. We, therefore, recommend that this unconventional monetary policy instrument should only be used in the short term for emergency situations as a clear central bank response to stabilize the economy.

Inflation Shocks and Disinflation: Stylised Facts from the Past 50 Years

In our study, we examine the circumstances under which major inflation shocks lead to persistently high inflation. For our analysis, we use macroeconomic data from a broad sample of countries for the past fifty years or more. We identify several cases where inflation rises from the single-digit range to above 20 per cent, followed by successful disinflation within two years. Similarly, there are many examples where inflation remains high after an initial shock. The former cases are characterised by more pronounced increases in interest rates during inflation shocks, more disciplined fiscal policy and favourable commodity price developments. Examining the same sample, we also show that the disinflation after a period of persistently high inflation was not typically accompanied by a significant slowdown in the real economy and instead was often followed by higher economic growth. In the disinflationary episodes we identified, the size of the real cost of disinflation is negatively correlated with the central bank independence, suggesting that a disinflationary commitment played a positive role.

Central Bank Independence and Monetary Policy Outcomes in Ghana: A Bayesian Structural Time Series Approach

Central Bank Independence and Monetary Policy Outcomes in Ghana: A Bayesian Structural Time Series Approach

Independence and Credibility of the Central Bank in a Situation of Financial Liberalization

This study attempts to advance our knowledge of the role, conduct, and standing of a credible, independent central bank in its duty to uphold the general price level's stability. In other words, it involves examining the theoretical and empirical connections between the effectiveness of monetary policy and debt, as well as the connections between independence and the maintenance of price stability in the Congolese economy in a context of financial liberalization. The study's research hypothesis—that the Central Bank of Congo is legally autonomous under the new law 027 of December 18th2018 regarding its structure and operations confirmed after examination. Although the stability of the currency depends on its monetary policy, this policy's implementation does not give rise to its legitimacy. A trustworthy central bank is one that can maintain the general price level, which is its ultimate goal.

Міжнародний досвід і впровадження монетарного режиму інфляційного таргетування в Україні

The aim of the article is to study the international experience, the experience of implementing the monetary regime of inflation targeting in Ukraine and formulate conclusions based on the results of the analysis of such implementation. It is determined that the basis of the practice of inflation targeting constitutes the idea that there are exclusively rational (inflationary) expectations of economic entities, which are subject to accurate calculation and influence. However, the presented arguments (the existence of business cycles, criticism from the position of adherers of behavioral economics, asymmetric information in financial markets) give grounds to assert that monetary policy can only preestimate the expectations of economic agents with a certain degree of probability. This explains the lack of an accurate correlation between the change in the central bank’s interest rate and its impact on the inflation rate. Based on the experience of foreign countries, it has been determined that at the first-priority stages of implementation of the studied monetary regime in the analyzed examples, there is a tendency to reduce the level of inflation due to increased requirements for the independence of central banks, their transparency and transparency of the monetary policy. The studied examples of the introduction of the monetary regime of inflation targeting show that the co-dependence of the regulatory influence of central banks and inflationary processes is caused by numerous factors (the formation of the institutional structure, the duration of the fight against inflationary processes, etc.). Further on, crisis situations reveal the peculiarity of the studied monetary regime: central banks do not directly manage inflationary processes, but adapt to them and curb inflation by means of a «soft» adjustment (as evidenced by the constant change in forecast analytics on inflation in future periods). The practice of introducing inflation targeting in Ukraine began in 2015 and there was a tendency to curb inflationary processes (which, in principle, is typical for the first-priority stages of the implementation of this monetary regime in other countries). However, the full-scale invasion of Ukraine by the Russian Federation in February 2022 made it impossible to continue the practice of implementing this monetary regime (due to the abandonment of the floating exchange rate, restrictions on foreign exchange transactions, monetary financing of the budget, etc.), which indicates limited opportunities for inflation targeting in extraordinary (crisis) situations.

Measuring Response of Stock Market to Central Bank Independence Shock

This paper examines the responses of stock traded and economic activity in relation to central bank independence shocks. The analysis is based on a panel Vector Autoregressive estimation covering 25 developing countries for a quarterly period between 1990 Q1 and 2021 Q4. Panel VAR estimation is known to be potentially biased in a dynamic panel data model if the coefficient on the endogenous variables differs across countries. To test the pooling assumption of the model, this paper applies the Chow and Roy-Zellner tests. The results establish that the models contain the heterogeneity among samples; thus, mean-group estimation for panel VAR is performed as a solution for heterogeneity problem. The results show that there is a delayed effect of CBI to increase stock traded. This demonstrates that CBI takes around six quarters to strengthen the financial market. By dividing the sample into two groups, we find that CBI has a different effect on stock traded for countries that have high and low stock traded.

Regulating Ex-ante and Ex-post Democratic Control of Independent Central Banks

Regulating Ex-ante and Ex-post Democratic Control of Independent Central Banks

Panel discussion of: Central bank independence

Panel discussion of: Central bank independence

Fiorella De Fiore discussion of: Central bank independence

Fiorella De Fiore discussion of: Central bank independence

Zsofia Barany discussion of: Central bank independence

Zsofia Barany discussion of: Central bank independence