Do central bank law reforms affect the term in office of central bank governors?

In this paper we confirm the hypothesis that central bank independence reforms reduce the likelihood that a central bank governor will be replaced. However, the strength of this effect depends on the rule of law and the degree of political polarization.     

Can central bank communication help to stabilise inflation expectations?

This paper examines whether central bank communication stabilises euro area inflation expectations through the information and news channel. A novelty of the study is its use of data from Google Analytics on ECB website traffic as proxy for visitors’ attention to its communication. We conduct several econometric tests with daily data to measure the impact of ECB communication on the information demand of the public and ultimately on inflation expectations. Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation expectations. We find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel.     

Does capital-based regulation affect bank pricing policy?

Journal of Regulatory Economics - This paper tests whether a series of changes to capital requirements transmitted to a change to banks’ pricing policy. We compile a rich bank-level...     

Are survey expectations theory-consistent? The role of central bank communication and news

In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy.     

Do central bank foreign exchange interventions affect market expectations?

The aim of this article is to study the impact of the Brazilian central bank swap interventions on the FX market from 2006 to 2013. In this period, these nontraditional interventions were the main FX instrument of the Brazilian Government. Since the central bank operates through a sequence of daily interventions in most of the period, we employ the event study method, which is appropriate to investigate cumulative impact of intervention episodes. We analyse the effects on the risk neutral distribution of BRL-USD exchange rate, which incorporates economic valuation besides the likelihoods. We investigate both changes in level and in the dynamics of the moments. Our tests indicate that interventions have little effects on the exchange rate distribution. We only find evidences of some impact on the dynamics of the mean, volatility and skewness over long horizons when the central bank takes short positions on the exchange rate.     

Does membership in international organizations increase governments’ credibility? Testing the effects of delegating powers

This paper analyzes whether nation-state governments can increase their credibility by becoming members of international organizations. It is hypothesized that the degree of delegation to international organizations can improve the credibility of nation-state governments. This hypothesis is tested by introducing three new indicators for international delegation. On the basis of panel data for up to 136 countries and the time period from 1984 to 2004, membership in international organizations is significantly and robustly linked with better credibility, here proxied for by country risk ratings.     

Does monetary policy credibility mitigate the fear of floating?

Based on the argument that monetary policy credibility can reduce the fear of floating, we analyze this hypothesis for a set of 47 countries (of which, 32 are developing countries, 26 are Inflation Targeting countries and 16 are Inflation Targeting developing countries). Our study is the first to empirically assess the impact of monetary policy credibility (defined as the central bank's ability to anchor inflation expectations to the target) on the central banks' reaction through the basic interest rate due to exchange rate fluctuations (fear of floating). Based on panel data methodology applied to different samples, the most important result of this paper is that monetary policy credibility is able to mitigate the fear of floating. However, this effect is weaker after the crisis. Our estimates also reveal that Inflation Targeting developing countries present stronger fear of floating, which is justified by the fear of inflation in these countries.     

Does bank efficiency matter? Market value relevance of bank efficiency in Australia

The stochastic frontier analysis is employed to investigate efficiency of publicly listed Australian banks over the period 1985 to 2008. The results suggest that technical, cost and profit efficiency of Australian banks have improved over time. Large banks have attained a higher level of cost efficiency but a lower level of technical efficiency compared to small banks. No substantial difference between the two groups is found in terms of profit efficiency. A panel regression of bank stock return on bank efficiency suggests that an improvement in technical, cost or profit efficiency contributes to the market value of a bank. Thus, the shareholder wealth maximization goal is aligned with the goal of maximizing bank efficiency in the Australian context.     

Does competition influence bank failures?

There has been a notable debate in the banking literature on the impact of bank competition on financial stability. The aim of this article is to provide the first investigation of the role of bank competition on the occurrence of bank failures. We analyse this issue on a large sample of Russian banks for the period 2001–2007, as the Russian banking industry is a unique example of an emerging market which has undergone a large number of bank failures during the last decade. Our findings support the view that tighter bank competition enhances the occurrence of bank failures. Thus, measures that increase bank competition could undermine financial stability.     

Is central bank conservatism desirable under learning?

In a New Keynesian model, we consider the delegation problem of the government when the central bank optimally sets discretionary monetary policy taking account of private expectations formed through adaptive learning. Learning gives rise to an incentive for the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation and induces thus a deviation from rational expectations equilibrium. However, discretionary monetary policy under learning suffers from an excessively low stabilization bias. To improve the social welfare, the government should appoint a liberal central banker, i.e., set a negative optimal inflation penalty that decreases with the value of learning coefficient. The main conclusions are valid under both constant- and decreasing-gain learning.     

Does privatization of daycare affect maternal employment?

This article is the first attempt to examine the privatization effects of daycare centres on the employment of mothers with preschool children. Analysing newly constructed municipality-level data for 2000, 2005 and 2010 in Japan, the results suggest that an increased proportion of private daycare centres has positive effects on mothers’ labour force participation, and the effects are large for municipalities in Tokyo metropolitan area.     

Conservative central banks: how conservative should a central bank be?

Using Rogoff's, 1985 model, we determine how inflation averse a central banker should be, given the level of volatility and projected output gap in the economy. We confirm a strong degree of conservatism, almost twice what society would have chosen. But, for a range of developing countries and the OECD, economies that systematically experience higher levels of output volatility would do best to hire a central banker who is more inflation averse than society, but less so than in stable developed economies. Thus, while a conservative central banker remains desirable, the trade‐off is with output volatility rather than with the output gap itself.     

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.     

Does aid affect inequality?

We show that there was a negative correlation between pro-poor aid and inequality in the period before the mid-2000s. This article provides an explanation for this observed relationship. Using panel data on 34 countries for the period 1996–2014, we test the hypothesis that pro-poor aid has an inequality-reducing effect. To demonstrate that the negative correlation is not spurious, we use dynamic panel techniques with alternative specifications. We show that the share of pro-poor aid has a negative effect on inequality. In addition, we show that the interaction term between the poverty rate and the change in pro-poor aid has a significant effect. These empirical results are consistent with our theoretical predictions. The results imply that aid can reduce inequality by altering the allocation of aid, rather than by increasing the amount of aid.     

An activist revival in central banking? Lessons from the history of economic thought and central bank practice

Abstract

We introduce the “minimalist–activist” spectrum as an analytical prism through which to view key aspects of central banking theory and practice. We focus on the activist end of this spectrum, concentrating on economic growth. We explore the theoretical roots of these ideas in the writings of Dennis Robertson. We illustrate central banking practice by detailing some approaches followed by central banks pursuing economic growth and development in the decades following the Second World War. History of monetary thought, monetary theory, and analysis of central bank practices blend together to illuminate key principles and practices of central banking.     

Do the central bank actions reduce interest rate volatility?

This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of this decision published one week later. Unlike related papers, we measure the market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompass market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both the decisions about the target rate and the communication event reduce the interest rate volatility.     

Who upholds the surging gold price? The role of the central bank worldwide

Who upholds the surging gold price? Conventional wisdom suggests that the depreciation of the exchange rate, inflation and economic turmoil are the suspects. Nonetheless, while these factors cease, why does the gold price still stay around hikes? The gold market belongs to a global arena. Different from other commodities, its participants include the national central banks worldwide. However, surprisingly, the role played by these tremendous market participants’ gold holdings on the gold price has been ignored in past empirical works. This research focuses on central banks’ gold holdings to explore who upholds the surging gold price. Several interesting outcomes are derived. First, our empirical evidence shows an inverse phenomenon relative to news reports from the mass media that the gold holdings of central banks worldwide in fact continuously descend. Second, the mainstream countries of the world have not played a main role in the rising trend of the gold price in the recent decade; instead, newly emerging industrialized countries’ central banks’ gold holdings show their significant power in explaining causality to gold price fluctuations. Third, the reason for the persistent gold buying behaviour of emerging economies may be because the increase in the gold price delivers a kind of short squeeze effect to the central banks of emerging countries.     

Does wealth inequality affect the transmission of monetary policy?

We provide evidence that higher wealth inequality between households is associated with stronger real effects of monetary policy. First, we use state-dependent local projections to show that the US and the UK exhibited stronger real effects of monetary policy in times of higher wealth inequality. Second, we measure wealth inequality within US states and document that economic activity responds more strongly to interest rate changes in states where wealth is distributed more unequally. Third, we show that ECB monetary policy has stronger real effects in Euro Area countries with higher wealth inequality.     

Does microfinance affect income inequality?

This study addresses the question whether participation of the poor in microfinance contributes to reducing a country’s level of income inequality. Using data from 70 developing countries, we show that higher levels of microfinance participation are indeed associated with a reduction of the income gap between rich and poor people. We also show, however, that the effects of microfinance on reducing income inequality are relatively small. The results of this study add to the discussion on the impact of microfinance on poverty by showing that, although access to microfinance does seem to improve the relative income position of the poor, this improvement is modest, which is probably because the use of microfinance is generally small as compared to the size of the economy of the countries in our sample. Microfinance should, therefore, not be seen as a panacea for bringing down income inequality in a significant way.     

Does increased credibility of elections lead to higher political competition? Evidence from India

A large amount of administrative effort is directed towards making elections credible and reducing electoral fraud in large democracies. However, it is not clear if such policy efforts have a feedback effect on political competition. In this paper, we exploit plausibly exogenous variation in perceptions of electoral credibility following the introduction of a technology-induced voting reform in India and find significant impacts on political competition. Electronic voting machines in India were mandated to include an additional layer of transparency by the introduction of a Voter-Verified Paper Audit Trail (VVPAT). We find that with the introduction of VVPAT, the winning margins and vote share of winners decline whereas the number of candidates in the average race increases. The results are robust to econometric concerns arising out of staggered implementation of the program providing support to our identification design. Our results also point to heterogeneous effects of the VVPAT roll-out in constituencies that received it only once relative to those that got the VVPAT in two successive elections. Interestingly, we note that much of the welfare improvement through increased political competition is reversed with more experience, suggesting the presence of important learning effects.