Political Regimes and the Cost of Disinflation

This study investigates, using data from 1960 to 1998, whether the nature of political regimes can help explain cross‐national and intertemporal variations in the cost of disinflationary policies, as measured by the sacrifice ratio. We show that, ceteris paribus, right‐wing governments have lower costs of disinflations than left‐wing governments. We argue this is due to a superior credibility, resulting from their stronger anti‐inflation reputations. In addition (and in marked contrast to previous studies), we find that when we control for political regimes, trade openness, and other standard factors in this literature, central bank independence has no significant effect on the sacrifice ratio.     

Openness, the sacrifice ratio, and inflation: Is there a puzzle?

The standard time-inconsistency-based explanation for the negative correlation between openness and inflation requires an inverse relationship between the sacrifice ratio and openness, but Daniels et al. (2005, Openness, central bank independence, and the sacrifice ratio. Journal of Money, Credit, and Banking 37 (2), 371–379.) have provided evidence that controlling for central bank independence reveals a positive relationship. This paper embeds the time-inconsistency approach within a model of a multisector, imperfectly competitive, open economy. In this setting, greater openness raises the sacrifice ratio but reduces the inflation bias. Thus, failure to observe an inverse relationship between openness and the sacrifice ratio does not necessarily imply that the time-inconsistency approach is irrelevant to understanding the openness–inflation relationship.     

The Impact of Central Bank Independence on Political Monetary Cycles in Advanced and Developing Nations

This paper examines the extent to which monetary policy is manipulated for political purposes during elections. We do not detect political monetary cycles in advanced countries or developing nations with independent central banks. We do find evidence, however, in developing countries that lack central bank independence. Furthermore, we find some evidence that these cycles are not caused by monetization of election-related fiscal expansions. This suggests that pressure by politicians on the central bank to exploit the Phillips curve may be an important factor in generating political monetary cycles.     

Does government ideology matter in monetary policy? A panel data analysis for OECD countries

This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1–2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers.     

Political monetary cycles and a de facto ranking of central bank independence

Political monetary cycles are less likely to occur in countries with independent central banks. Independent central banks can withstand political pressure to stimulate the economy before elections or finance election-related increases in government spending. Based on this logic and supporting evidence, we construct a de facto ranking of central bank independence derived from the extent to which monetary policy varies with the electoral cycle. The ranking avoids well-known problems with existing measures of central bank independence and provides independent information about average inflation and inflation volatility differences across countries.     

The impact of central bank independence on the performance of inflation targeting regimes

This paper examines the effects of inflation targeting on inflation in both advanced and emerging economies. We do not detect significant effects in advanced economies and only find small benefits in emerging economies, in line with previous studies. However, when we differentiate the impact of inflation targeting based on the degree of central bank independence, we find large effects in emerging economies with low central bank independence. Our results therefore suggest that central bank independence is not a prerequisite for countries to experience significant declines in inflation following the adoption of inflation targeting. Furthermore, we provide evidence that one channel through which inflation targeting lowers inflation more in countries with low central bank independence is the reduction of budget deficits following the adoption of an inflation target.     

中国能进一步提高央行独立性以改善货币政策可信度吗?

中央银行独立性是决定货币政策可信度(信誉)的一个重要体制性特征因素。在中国,央行独立性受到政治基础结构、司法独立性、经济金融基础结构和社会文化环境等制度结构方面的现实约束,即便照搬西方国家经验在立法层面确立央行独立性,这种外生的法定独立性也不能转化为真正的实践准则;在当下的中国要改善货币政策可信度,不能期望进一步提高央行独立性来实现,而应寻求其他路径。     

A Cross‐Country Analysis of the Bank Supervisory Framework and Bank Performance

Ongoing changes in the structure and nature of banking, as well as banking crises across the globe have focused the attention of policy makers on the appropriate structure, scope, and degree of independence of banking supervision. Key issues for banking supervision structure are whether there should be one or multiple supervisory authorities, and whether the central bank should be involved in bank supervision. The issue pertaining to the scope of supervision is whether bank supervisory authorities should supervise other financial service industries, including in particular securities and insurance. Finally, the issue regarding the independence of supervisory authorities is the degree to which bank supervisors should be subject to political and economic policy pressure and influence. How these issues are addressed is important, because policies that fail to provide for an appropriate bank supervisory framework may undermine bank performance and even lead to full‐scale banking crises. The intense interest policy makers have shown in these issues has not been matched, however, by researchers. In particular, there is very little systematic empirical evidence on how, or indeed whether, the structure, scope, or independence of bank supervision affects the banking industry. This paper addresses this gap in three respects. First, drawing on the existing literature, we discuss the various policy issues surrounding the structure, scope, and degree of independence of bank supervision. Second, we provide comparative information on the actual choices that have been made regarding these three aspects of supervision across a wide range of developed and emerging market economies. Third, using both country‐specific data for 55 countries in all parts of the world, and data for over 2,300 individual banks in those countries, we examine the relationship between the structure, scope, and independence of bank supervision and one key dimension of the banking industry – bank profitability. Our results indicate, at most, a weak influence for the structure of supervision on bank performance. In particular, we find some evidence that a single‐supervisor system enhances bank performance. However, following our discussion of the caution one must use in interpreting data on the supervisory framework, our re‐estimates using an alternative source of data on the structure of supervision failed to duplicate this result. Our results have a bearing on a key dimension of the policy debate on how to structure supervision. In particular, given the dearth of empirical evidence on the issues, advocates of one form or another of supervisory structure have asserted that a particular change is likely to affect (favorably or adversely, as the advocate sees fit) the performance of banks. Our results provide little support at best to the belief that any particular bank supervisory structure will greatly affect bank performance. This is significant, because it suggests that the on‐going debate might more broadly focus on the impact of the supervisory structure on other aspects of the health of the banking system, including individual bank safety and soundness, systemic stability, and the development of the banking system.     

The central banker as prudential supervisor: Does independence matter?

We study whether central bank independence (CBI) and monetary policy arrangements can jointly influence the likelihood of policymakers assigning banking supervision to central banks. Our empirical analysis shows that, assuming a benevolent government, a higher degree of central bank operational (economic) independence is associated with a lower probability of supervisory powers being entrusted to the monetary authority. We interpret this result as deriving from governments’ fear of the risk of excessively discretionary monetary policy. However, there is evidence that – conditional on operational independence – central banks are more involved in supervision when they pursue tighter monetary policy goals (a specific aspect of political independence). Our interpretation is that the latter may represent a commitment to mitigate central banks’ discretion in the monetization of financial distress. Our study suggests that CBI can be relevant, not only for its alleged effects on macroeconomic variables, but also in influencing policymakers’ decisions on the allocation of banking supervisory powers.     

中央银行独立性:一个新政治经济学分析框架

中央银行独立性是中央银行制度建设的基础与理论探讨的焦点,许多机构或学者从不同角度予以分析论证。新政治经济学关于中央银行独立性的研究已经形成丰富的理论资源,诸如政治周期理论、时间非一致性理论及公共选择理论对于中央银行制度建设具有重要的学术价值。     

Central bank independence and financial instability

It has been argued that central bank independence (CBI) may not only be beneficial for reaching the objective of price stability, but also for maintaining financial stability. Greater independence from external pressure implies that central banks are less politically constrained in acting to prevent financial distress, while it also will allow them to act earlier and more decisively when a crisis erupts. We estimate the relation between CBI and a newly constructed measure of financial instability using a dynamic panel model for the period 1985–2005 with a large set of control variables. We find a significant and robust negative relation between CBI and financial instability, which is mostly due to political independence.     

Dynamic central bank independence indices and inflation rate: A new empirical exploration

It has been argued that economies with more independent central banks experience lower inflation over time. In this paper we show that this relationship is sensitive to the methodology through which central bank independence indices are constructed. We stress the importance of employing dynamic central bank independence indices in two ways. First, we perform unit root tests with structural breaks to verify if the implementation of central bank reforms represents a structural break for the inflation rate dynamics. Second, we implement a panel data analysis.We find evidence that legislative reforms that modify the degree of independence of a central bank have a strong impact on the inflation rate dynamics. Moreover, underlying the importance of employing dynamic central bank independence indices, we confirm the negative relationship between the latter and inflation for a sample of 10 OECD countries.     

Replacing a “Disobedient” Central Bank Governor with a “Docile” One: A Novel Measure of Central Bank Independence and Its Effect on Inflation

This paper identifies two mechanisms that empirical papers on central bank independence assume to be embedded in the yardstick measure of turnover rate of central bank governor: (i) the removal of a governor who is perceived as a challenger by the government and (ii) whether his/her replacement is an ally of the government. We identify the first mechanism with premature exits of central bankers and the second by examining whether or not the incoming governor is drawn from the ranks of the executive branch of the government. We find that only premature exits and replacements with government allies increase inflation.     

政治关联、融资渠道与民营企业非效率投资研究

从自由现金流和银行贷款两方面考量2007~2010年沪深A股民营上市企业政治关联对企业非效率投资的影响。结果表明,存在政治关联民营企业容易利用自由现金流和银行长期贷款进行过度投资;存在地方政治关联的民营企业,其自由现金流的过度投资更严重,中央政治关联企业则存在更多利用长期贷款进行过度投资的行为。同时,投资不足的民营企业政治关联降低了企业投资对于自由现金流和银行短期贷款的依赖;中央政治关联的民营企业投资对于银行长期贷款的敏感度更高,地方政治关联企业未发现类似的显著影响。     

Financial supervision regimes and bank efficiency: International evidence

There exists a lively debate as for the appropriate architecture of the financial supervision regime, with a long list of theoretical advantages and disadvantages associated with each one of its key dimensions. The present study investigates whether and how bank profit efficiency is influenced by the central bank’s involvement in financial supervision, the unification of financial authorities, and the independence of the central bank. The results show that efficiency decreases as the number of the financial sectors that are supervised by the central bank increases. Additionally, banks operating in countries with greater unification of supervisory authorities are less profit efficient. Finally, central bank independence has a negative impact on bank profit efficiency.     

Reserve Requirements,Liquidity Risk,and Bank Lending Behavior

Although reserve requirements (RR) have been used in emerging markets to smooth credit cycles, the transmission mechanism remains blurry. Using bank‐level data, we unveil the interaction of RR with bank lending. We identify a new channel that works through a decline in banks’ liquid assets and loan supply due to an increase in RR. “Quantitative tightening” through RR raises the short‐term funding needs of the banking system, which is met by collateralized central bank lending, thus depleting banks’ unencumbered liquid assets. Our results suggest that such a shift in bank liquidity is associated with a significant change in lending.     

Measuring the Independence of Central Banks and Its Effect on Policy Outcomes

Making the central bank an agency with the mandate and reputationfor maintaining price stability is a means by which a governmentcan choose the strength of its commitment to price stability.This article develops four measures of central bank independenceand explores their relation with inflation outcomes. An aggregatelegal index is developed for four decades in 72 countries. Threeindicators of actual independence are developed: the rate ofturnover of central bank governors, an index based on a questionnaireanswered by specialists in 23 countries, and an aggregationof the legal index and the rate of turnover. Legal independence is inversely related to inflation in industrial,but not in developing, countries. In developing countries theactual frequency of change of the chief executive officer ofthe bank is a better proxy for central bank independence. Aninflation-based index of overall central bank independence contributessignificantly to explaining cross-country variations in therate of inflation.     

UK policy coordination: the importance of institutional design

This paper considers the principles that underpin the design of the UK's macroeconomic framework, with particular emphasis on the importance of good institutional design in ensuring effective coordination of monetary and fiscal policy when an independent Bank of England Monetary Policy Committee has operational responsibility for setting interest rates. The theoretical literature on policy coordination finds that the cost of central bank independence is less monetary‐fiscal coordination. We argue that once account is taken of the institutional arrangements, this conclusion does not hold for the UK. In fact, the UK macroeconomic policy framework represents a significant improvement in policy coordination through mechanisms that allow for greater transparency and accountability in policy‐making. Among the measures discussed in the paper is the role of the Treasury Representative on the Bank of England Monetary Policy Committee.     

Two Naked Emperors?* Concerns about the Stability & Growth Pact and Second Thoughts about Central Bank Independence

This paper addresses two sets of issues relevant to current and prospective future E(M)U members: the consequences of the Stability & Growth Pact for fiscal‐financial sustainability and macroeconomic stability, and some risks associated with operational independence of the central bank. To be effective as a lender of last resort or to stabilise demand when short nominal interest rates are close to their zero lower bound, the central bank must coordinate and cooperate with the fiscal authorities. Central bank independence is unlikely to survive if such coordination and cooperation are not forthcoming.     

Exchange Rate Targeting and Gold Demand by Central Banks: Modeling International Reserves Composition

This article explores the composition of international reserves under a central bank’s exchange rate policy target. The model allows for numerical estimation of a shadow price of the target exchange rate, interpreted as the central bank’s sacrifice of policy precision for additional unit of portfolio variance or return. The simulations indicate a percentage range gold demand by monetary authority in two regimes under multiple equilibria. Accumulating foreign reserves as precautionary policy suggests increasing shares of gold demand. The central bank would incur greater exchange rate target sacrifice if it wants to achieve higher portfolio returns. The results suggest that ability to target the exchange rate is unaffected by the higher volatility of monthly returns on gold.