Central Bank Independence Research Articles

Did the Bank of England’s Quantitative Easing Programme Become Fiscally Wasteful?

Abstract In the period of central bank independence since 1997, the level of UK nominal interest rates has been driven almost entirely by real rates as reflected in the market for index-linked government bonds. These bonds offered a yield of + 4% in the 1980s, falling steadily to below -2% in late 2019, and only recovered somewhat in 2022, with long bond yields closely following short bond yields. The Bank of England doubled its purchases of bonds through its Quantitative Easing (QE) programme in 2020–21 at significantly negative real interest rates, taking up almost all of the increased supply associated with the massively increased budget deficit during the Covid-19 pandemic. Neither the Bank nor the Government bothered about the likely eventual fiscal cost, which rose quite steeply at the margin to the extent that the QE purchases had their intended effect of depressing bond yields. Much, but not all, of the blame for this lies with the Government, since under independence it is the Government that defines what the Bank should take into account in making its decisions about monetary policy. The issue of the eventual fiscal cost of QE is also of concern in the Euro Area and the United States.

Maastricht Overcome: An Evolving Disconnect Between the ECB’s Power and Independence

In the course of the last two decades, the legitimacy of the European Central Bank (ECB) has withered as monetary policy has become more politicized. This editorial places these debates in the context of the literature on central bank independence. Many critical voices warned—long before the crisis—that the ideal of highly independent central banks with narrow technocratic mandates would not work in the long term and would come under particular pressure during periods of instability. Indeed, after over a decade of ongoing crisis, the ECB’s functions have expanded considerably, which in turn altered its relationship with other institutions and its role in the economic and political system of the European Union. In particular, the ECB’s activities during the eurozone crisis, new debates on whether the ECB should support political goals like the fight against climate change, and its participation in geopolitical stand-offs have brought its political role clearly to the fore. Crucially, this evolution challenges the ECB’s high degree of independence, as decisions that are closely related to political debate also require stronger political (democratic) legitimacy and legal accountability.

Foreign aid towards accelerated economic growth in Africa: the role of independent central banks, political institutions and monetary integration

Foreign aid towards accelerated economic growth in Africa: the role of independent central banks, political institutions and monetary integration

Foreign aid towards accelerated economic growth in Africa: the role of independent central banks, political institutions and monetary integration

Foreign aid towards accelerated economic growth in Africa: the role of independent central banks, political institutions and monetary integration

Monetary union effects on high inflation episodes

AbstractThis paper analyses whether monetary union membership reduces the duration of high inflation episodes (HIEs). The study uses survival models estimated on a sample of 190 countries over the period 1950M01 to 2022M12. The results show that despite the often‐cited issue of the heterogeneity of member countries, monetary unions significantly reduce the duration of HIEs, but not deflation episodes. This result remains robust to a battery of tests and is valid for both developed and developing countries. Furthermore, the results show that giving up monetary sovereignty in favour of an independent common central bank is more effective in terms of price stability than adopting inflation targeting. However, for countries seeking to preserve their monetary sovereignty, inflation targeting remains the best option for reducing the duration of HIEs. This performance of monetary unions in terms of price stability appears to be linked to the greater de facto independence of their central banks, the adoption of supranational fiscal rules, and the incentives to preserve the durability of the currency area. However, estimates show that the capacity of a monetary union to limit HIEs among its members diminishes as it expands to include new countries.

Political and Institutional Determinants of Foreign Direct Investment (FDI) Inflows in Latin American Countries, 1995-2020

This study examines the determinants of FDI inflows in 17 Latin American countries from 1995 to 2020. With recourse to dynamic panel models and various robustness checks, our analysis reveals that external, macroeconomic, fiscal, and institutional variables emerge as some of the most reliable predictors of FDI inflows to countries within the region. The importance of central bank independence (CBI) and US monetary policy shocks is one of the key results obtained in this study, contributing significantly to the literature on FDI determinants in emerging economies. Our paper is a timely contribution given the FDI trends throughout the region and ongoing policy debates in some markets over CBI.

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?

CBDC and Trust in A Central Bank: Transitivity Of Preferences Vs. The Privacy Paradox

Abstract The privacy and anonymity of transactions are considered some of the biggest challenges when designing Central Bank Digital Currencies (CBDC). While many surveys show that people strongly prefer privacy in their transactions, behavioral theories suggest that human behaviour in digital spaces is more complex, a phenomenon known as the privacy paradox. The research aims to measure privacy preferences in specific situations and examine how these preferences influence choices between anonymous transactions versus the design of CBDC functionality. The study used the ANOVA method to determine if there were significant differences between groups based on privacy preferences. Survey data from respondents in emerging markets showed a mild form of the privacy paradox. The research measured privacy tendencies in three areas: general, digital, and financial environments, and found a statistically significant correlation between these measures. However, the respondents' privacy preferences did not consistently align with their choices between transaction anonymity and CBDC functionality, nor did they consistently relate to trust in central banks as privacy guarantors or the importance of central bank independence for ensuring privacy. The ANOVA test found no significant differences in privacy preferences between respondents who prioritized anonymity or functionality, or between those who trusted or did not trust central banks to guarantee privacy and their independence in doing so. This suggests that when faced with complex decisions, people may exhibit intricate patterns of preference, which is crucial for optimizing CBDC design.

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

THE NATURAL PRICE OF MONEY MAKES THE INDEPENDENCE OF CENTRAL BANKS OBSOLETE

Relying on the theoretical meaning and the normative value of the natural rate of interest, as inherited from the founders of the economic science, this article aims to demonstrate that the independence of central banks can only be a technical one – one of “dentists”, as Keynes would say. To prove our thesis, we set out to build our analysis onto three directions. First, we identify arguments to show that excessive independence, by means of the ‘new classical economics’, is not sustainable. Then, we show how the natural rate of interest renders the central bank more disciplined and shapes its independence only within technical boundaries. And thirdly, we show how the attempts to preserve its extended independence by keeping some features of the natural rate remain tentative.

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