Role Of Central Bank Independence Research Articles

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

Banking system stability in crisis periods: The impact of the banking regulator independence

Local and global financial crises are caused by a wide range of geopolitical, macro-financial, and socio-economic determinants. The purpose of this study is to assess the role of central bank independence in preventing financial crises and mitigating their consequences. Two hypotheses were tested. A measure of the banking regulator independence is the CWN index of the central bank independence. The hypotheses were tested on data from 53 countries suffering from financial crises over the last 40 years (the sample includes both developed and developing countries from different continents). The tools of nonlinear logit regression (modeling the probability of loss of financial stability due to a financial crisis, considering different levels of the banking regulator independence) and panel regression with random effects (modeling the influence of the banking regulator independence on banking activities during crisis periods) were used for calculations. The study did not confirm that a high level of central bank independence is a necessary condition for preventing the occurrence of financial crises in the national economy. On the contrary, the likelihood of financial instability was found to be higher in countries with more independent central banks. Thus, during crisis periods, an increase in the CWN index by 1 ensures an increase in the regulatory capital adequacy parameter by an average of 0.28%, a decrease in return on assets by 0.59%, and an increase in the share of non-performing loans by 1.69%.

Duration of fixed exchange rate regimes: the role of central bank independence

ABSTRACT Using a comprehensive dataset, this paper estimates a hazard model to examine whether central bank independence matters for the sustainability of fixed exchange rate regimes. The findings suggest that fixed exchange rate regimes are more likely to have a longer duration under more independent central banks; a result that holds true whether an exit from such a regime is orderly or disorderly. Thus, a more independent central bank is more likely to facilitate a more durable fixed exchange rate regime.

CENTRAL BANK INDEPENDENCE AND THE ISSUES OF UNCERTAINTY IN THE IMPLEMENTATION OF MONETARY POLICY: STRENGTHS AND LIMITATIONS, REMEDIES AND PARADOXES

Within the framework of this article, we deal with the primordial role of central bank independence, which constitutes a fundamental institutional element and a sine qua-non condition for the conduct of monetary policy in a framework that tends towards stability and that endangers the framework of uncertainty. The independent central bank theory remedies the framework of temporal inconsistency that integrates central banking and the conduct of monetary policy into the disruptive influence of political power, and emphasizes a stability framework at the central bank that contributes to the credibility of the central bank and allows it to influence the behaviour of economic actors through an efficient expectations channel. Despite the crucial advantages and contributions of the independent central bank theory, however, it has several limitations and drawbacks. In this respect, the theory of central bank governance is presented through its two facets, namely internal and external governance theory, as two institutional instruments that make it possible, on the one hand, to remedy the limitations of the theory of the independent central bank and, on the other hand, to strengthen its contributions and its inescapable assets.

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.

Role of Central Bank Independence in Banking and Financial Stability Ensuring

This paper is devoted to defining the role of the central bank in ensuring banking and financial stability. The main purpose of the study is to assess the direction and strength of the impact of central bank independence in terms of its individual aspects on the parameters of banking and financial stability for different groups of countries. Systematization of literature sources and the results of existing empirical research has shown that the expected effects of increasing the independence of the central bank are to improve banking and financial stability. For the study, a sample of statistical data for 10 developed and 10 developing countries for the period 1991-2012 was formed. The methodological basis of the study were the tools of panel regression modeling with fixed effects with Stata software use. The article presents the results of empirical analysis, which showed that the independence of the central bank is an important factor in ensuring banking stability. At the same time, the impact on financial stability has not been conclusively confirmed. The study empirically confirms and theoretically proves that the stage of development of the country determines the strength of such influence. Thus, developed countries generally show closer links between central bank independence and banking and financial stability, which in most cases are directly dependent, while developing countries have less lasting effects. The results of the analysis of the links between certain aspects of central bank independence and the level of banking and financial stability are of great practical value. The results of the study create a scientific basis for substantiating the sequence of actions aimed at strengthening the independence of the central bank. Thus, in developing countries, the focus should be on defining and prioritizing central bank goals, while developed countries should take a deeper approach to this issue and ensure the independence of monetary policy and financial independence of the central bank. Keywords: central bank, independence, banking stability, financial stability, Z-score, non-performing loans, capitalization, developed countries, developing countries, panel data.

Increasing public debt and the role of central bank independence for debt maturities

Governments are interested in lengthening debt maturity to reduce fiscal, refinancing, and default risks. On the other hand, investors may worry that highly indebted governments will inflate away their debts when it is long-term. Based on a new panel dataset spanning from 1990–2016 for 28 OECD countries, the paper finds that governments prolong the average debt maturity, if debt ratios increase. Interestingly, the marginal effect of the debt ratio on average maturity is higher for countries with an independent central bank than for countries with a more politically dependent one. There are two possible explanations for this effect of central bank independence. First, an independent central bank reduces the inflation risk premium that longer maturities otherwise would have. Second, governments with independent central banks are unable to use monetary policy for inflating and reducing fiscal and interest rate shock burdens. Again, this calls for longer maturities to reduce the relevant risks.

Sectoral variability and the foundations of optimal inflation rate

ABSTRACTThe recent monetary search models argue that the real effects of inflation on economic activity can be gauged through relative price variability (RPV). Our study uses a large panel data of 32 developed and emerging European economies to test the relationship between inflation and RPV. We use a panel threshold model to explore the regime-specific effects of inflation on RPV. Our results confirm a non-linear profile of the relationship between inflation and RPV. Consistent with the monetary search models, our results show that the effects of inflation on the RPV are more significant in its low (below 0.792% per annum) and high (beyond 2.064% per annum) regimes. Finally, we also report a strong moderating role of central bank independence (CBI) in the inflation–RPV relationship.

Financial Supervision and Bank Profitability: Evidence from East Asia

The growing fragility of the financial system has led to the increasing importance of financial supervision's role. In particular, the financial supervision regime is expected to promote bank performance and maintain financial stability. Unfortunately, studies on the relationship between banking supervisory regimes and bank performance are still limited. To address this issue, this paper focuses on the following four aspects of banking supervision:(i) the structure of supervisory frameworks, (ii) the independence of supervisory institutions (iii) the scope of supervisory role; and (iv) the authority of central banks in the banking sector. We use country-specific data for seven East-Asian countries and data for 39 individual banks in those countries over the period of 2006–2011 to examine how different financial supervision regimes in the region influence bank performance. The results show strong evidence that the existence of a single bank supervisor, instead of multiple, will enhance bank profitability. Mean while, there is a mixed result regarding the role of central bank independence in improving bank profitability. Furthermore, the authority of central banks in the banking sector and the scope of bank supervision do not show strong relationship with bank performance.

Does central bank independence really matter? Re-assessing the role of the independence of monetary policy-makers in macroeconomic outcomes

Despite the growing literature, central bank independence (CBI) is still one of the most controversial and frequently discussed issues in macroeconomics. This paper re-examines the role of central bank independence in macroeconomic outcomes, seeking to add to the existing empirical literature in two ways: first, we control for factors, which might account for the cross-country differences in macroeconomic outcomes, but which, either individually or as a group, are often given no adequate attention in existing studies; second, in addition to standard regressions, we use Markov-Chain Monte-Carlo estimation methods from a Bayesian perspective, which are believed to improve result robustness by increasing parameter accuracy and reducing the effect of outlying observations. Based on (average) data from 39 countries covering the time-periods 1981–1989, 1991–1998 and 1999–2006, our estimates suggest that lower inflation should be seen as resulting from a broad range of institutional and structural factors, with CB independence failing to play the key role. We also find no consistent evidence of a positive relationship between central bank independence and employment growth or evidence that it reduces economic instability.

The role of central bank independence on optimal taxation and seigniorage

Should inflation be thought of as “just another tax?” The theoretical basis for doing so dates back to Phelps (1973) and has been greatly refined ever since. Since optimal taxation minimizes the deadweight loss by equalizing the marginal distortions of all available taxes, including the inflation tax, a key distinctive theoretical implication obtained by these models is that inflation and tax rates have a positive relationship. While theoretically appealing, empirical studies find virtually no support for this key implication.We show that, considering the role of central bank independence (CBI), it is possible to reconcile the main theoretical implications of models of optimal taxation and seigniorage with the empirical evidence. Different degrees of CBI capture the extent to which monetary policy is effectively controlled by the fiscal authority. Our model generates three testable implications: i) if CBI is low, the optimal relationship between inflation and tax rates is positive, ii) such relationship is a decreasing function of the degree of CBI, and iii) the relationship is negative for high levels of CBI. We show that these hypotheses hold for alternative measures of tax policy, seigniorage, and CBI as well as after controlling for several macroeconomic performance, ideology, political instability, governance, and economic structural/development factors.

Central bank independence: A social economic and democratic critique

AbstractThe advent of quantitative easing by the world’s major central banks invites renewed questions about the meaning and role of central bank independence in an age of economic crisis. This article draws together insights from economic sociology, history and democratic theory to engage in further discussion about the proper role of central banks in democratic society. We stress some related themes. Our brief history of central banks aims to show how these banks have always been embedded in economic and political coalitions and conflicts, therefore qualifying the term independence; our study also aims to show that in satisficing between conflicting tasks, central banks need to maintain a balance between cognitive competences and normative expectations. Independence is better understood as a form of dependence on the coalition of interests that supported the financial climate prevailing before the global crisis of 2008, one of low wage-price inflation, high borrowing and debt, and loss of prudential control. We argue that independence amounts to a form of re-privatisation of central banks, and that they are increasingly suborned to the pressures of financial markets. At the same time, asset price inflation has sacrificed growth and employment and therefore prolongs the crisis. The economic measures now demanded by the financial crisis prompt new doubts about the independent central bank experiment, potentially in favour of the ex ante model of governmental oversight of central banks.

Fear of Floating and de Facto Exchange Rate Pegs with Multiple Key Currencies1

This paper adopts and develops the “fear of floating” theory to explain the decision to implement a de facto peg, the choice of anchor currency among multiple key currencies, and the role of central bank independence for these choices. We argue that since exchange rate depreciations are passed-through into higher prices of imported goods, avoiding the import of inflation provides an important motive to de facto peg the exchange rate in import-dependent countries. This study shows that the choice of anchor currency is determined by the degree of dependence of the potentially pegging country on imports from the key currency country and on imports from the key currency area, consisting of all countries which have already pegged to this key currency. The fear of floating approach also predicts that countries with more independent central banks are more likely to de facto peg their exchange rate since independent central banks are more averse to inflation than governments and can de facto peg a country's exchange rate independently of the government.

The Role of Central Bank Independence on Optimal Taxation and Seigniorage

Should inflation be thought of as just another tax? The theoretical basis for doing so dates back to Phelps (1973) and has been greatly refined ever since. Since optimal taxation minimizes the deadweight loss by equalizing the marginal distortions of all available taxes, including the inflation tax, a key distinctive theoretical implication obtained by these models is that inflation and tax rates have a positive relationship. While theoretically appealing, empirical studies and virtually no support for this key implication. We show that, considering the role of central bank independence (CBI), it is possible to reconcile the main theoretical implications of models of optimal taxation and seigniorage with the empirical evidence. Different degrees of CBI capture the extent to which monetary policy is effectively controlled by the fiscal authority. Our model generates three testable implications: i) if CBI is low, the optimal relationship between inflation and tax rates is positive, ii) such relationship is a decreasing function of the degree of CBI, and iii) it is negative for high levels of CBI. We show that these hypotheses hold for alternative measures of tax rates, groups of countries, and macroeconomic theories regarding the determination of the level of inflation.

No Single Definition of Central Bank Independence is Right for All Countries

This paper uses a new international data set covering over 100 countries for the period 1990-2004 to investigate the relationship between central bank independence (CBI) and inflation. It is argued that CBI is best thought as a collection of de jure and de facto characteristics. However, there is no single mix of characteristics that permits one to uniquely define what constitutes central bank independence. No single definition of central bank independence is 'right' for all countries. As the distribution of inflation around the world is concentrated in the tails of the distribution, as are many of the determinants of inflation, a quantile regression approach is the appropriate methodology to investigate the role of CBI. We do find strong evidence that several core elements of what can be defined as CBI do reduce inflation.

Coordination of monetary and fiscal policy

To achieve price stability, coordination of monetary and fiscal polices is required. The importance of coordination results from such premises as understanding the interdependence between monetary and fiscal policy, the role of central bank independence, the instruments-targets relation and financial stability as well. The lack of coordination will result in inferior overall economic performance, whereas providing it will give a better outcome for both policymakers. Therefore, coordination may be treated as the necessary condition for achieving price stability. (original abstract)

Measuring Central Bank Independence in Selected Transition Countries and the Disinflation Process

The paper measures the degree of legal and actual central bank independence (CBI) in five Central and Eastern European transition economies striving for EU accession, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia (CEEC-5). The degree of legal CBI is measured by applying the two most widely used indices, the Cukierman and the Grilli-Masciandaro-Tabellini (GMT) indices. Moreover, the turnover rate of central bank governors is used as a proxy to measure actual CBI. The paper gives an interpretation of computed results, comparing the findings with those of other authors and earlier calculations. Furthermore, the indices on legal and actual CBI themselves are critically reviewed, in particular against the background of the Maastricht Treaty requirements, which in practice constitute the driving force for any amendment of central bank laws in the CEEC-5. Moreover, the role of CBI in bringing down inflation in the CEEC-5 at different stages of transition is briefly discussed. The paper concludes that the overall degree of legal CBI is comparatively high in all countries examined, while the measured turnover rates of governors do not seem to fully reflect the degree of actual CBI in the CEEC-5. Looking at the role of CBI in the disinflation process at different stages of transition, the main causes for inflation seem to have been beyond the direct control of the central bank. A high degree of CBI, together with a reasonable mix of fiscal and monetary policies as well as structural reforms, will be necessary for the CEEC-5 to meet all requirements for joining the EU and, in a more distant future, for adopting the euro.

Credibility of Central Bank Independence Revisited

The specific role of central bank independence in determining the overall credibility of monetary policy is addressed in this paper. It is argued that the credibility of delegating monetary policy to an independent central bank is endogenous to the credibility of the inflation target because a “conservative” inflation target may not be compatible with the fiscal policy stance. Also, lack of transparency in designing the institutional set-up is shown to be welfare-reducing.

Central Bank Autonomy, the Exchange Rate Constraint and Inflation: The Case of Italy, 1970–1992

This paper analyzes the determinants of inflation in Italy over the period 1970–1992. Particular emphasis is placed on the role of central bank independence in influencing monetary growth, and on the role of monetary growth and of the Exchange rate Mechanism (ERM) in affecting inflation. In the 1970s and early 1980s, when the Bank of Italy lacked independence and the ERM was still not credible, monetary growth was highly unstable and was the main determinant of Italian inflation, although oil price and tax shocks also played a role. After the March 1983 general exchange rate realignment and the French U-turn, the ERM became more credible and monetary growth stopped being a significant determinant of inflation; instead, the German inflation became the main variable influencing Italian inflation.