Challenges in Central Banking

Half-title......Page 3
Title......Page 5
Copyright......Page 6
Dedication......Page 7
Contents......Page 9
List of Tables, Figures, and Appendices......Page 14
Contributors......Page 17
Preface......Page 19
1.1 Introduction......Page 21
1.2 Part I: Past, Present, and Future in the Conduct of Monetary Policy......Page 22
1.3 Part II: The Scope of Central Banking Operations and Central Bank Independence......Page 26
1.4 Part III: Transparency and Governance in Central Banking......Page 31
References......Page 35
Part I Past, Present, and Future in the Conduct of Monetary Policy......Page 39
Abstract......Page 41
2.1 Introduction......Page 42
2.2.1 The Optimality of Price-Level Stability in the New Keynesian Model......Page 47
Optimal monetary policy under discretion......Page 48
Optimal monetary policy under commitment......Page 49
Delegating a price-level target to a discretionary central bank......Page 52
2.2.2 Price-Level Stability, Zero Lower Bound, and Deflationary Spirals......Page 54
2.2.3 Going Beyond the Basic New Keynesian Model......Page 56
2.3 Two Objections to PLPS......Page 59
2.3.1 Unrealistic Reliance on Credibility......Page 60
2.3.2 Uncertainty and Price-Level Stability......Page 65
2.4 Conclusions......Page 66
References......Page 68
3.1 Introduction......Page 72
3.2 Background, History, and Context......Page 75
3.3 Time Inconsistency, Discretion, and Central Banker Contracts......Page 77
3.3.1 Commitment and Optimal Policy......Page 78
3.3.3 Explicit Contracts as a Remedy for Time Inconsistency......Page 79
3.3.4 Contracts and the Selfish Central Banker......Page 82
3.4.1 Solutions to Inconsistency of Optimal Plans......Page 83
3.4.2 Monetary Policy under Contracts and Incomplete Information......Page 89
3.5 Conclusion......Page 95
References......Page 99
4.1 Introduction......Page 103
4.2 The Institutional Aspects of Monetary Policy Decisions......Page 106
What exactly do central banks announce?......Page 109
Policy rate choice and monetary policy strategy: any relationship?......Page 110
What governs the choice of the policy rate?......Page 111
Interest Rate Targets: The Current Mainstream......Page 112
Residual uses of quantity targets......Page 113
Implications for overnight rate volatility......Page 114
Settlement Balances......Page 118
Reserve requirements: design, usage, and functions......Page 119
4.5.1 Standing Facilities: Evolving Roles......Page 124
4.5.2 Discretionary Operations......Page 129
4.5.3 Putting the Pieces Together......Page 133
4.6 Concluding Remarks: And the Evolution Continues......Page 134
References......Page 135
Part II The Scope of Central Banking Operations and Central Bank Independence......Page 139
5.1 Introduction: The Financial Stability Role of Central Banks......Page 141
5.2 Historical Development of the Financial Stability Role of Central Banks......Page 142
5.3 The Functions of a Central Bank in the Provision of Financial Stability......Page 147
5.4 Recent Challenges to the Financial Stability Role of Central Banks......Page 150
5.5 Is There a Theoretical Basis for the Conduct of Financial Stability?......Page 153
5.6 Conclusions......Page 161
References......Page 162
6.1 Introduction......Page 166
6.2 Monetary Stability......Page 167
6.3 Financial Stability......Page 168
6.4 Failure Through Loss of Liquidity......Page 169
6.5 Internationalization and Classic LOLR......Page 172
6.7 Failure Through Loss of Capital......Page 176
6.8 Dealing with Failure......Page 179
6.9 Cross-Border Institutional Structures that Renationalize the Problem......Page 182
6.10 Cross-Border Institutional Structures with Joint Responsibility......Page 185
6.11 Adequate Powers......Page 186
6.12 Preventing Problems......Page 189
6.13 Cross-Border Financial Markets......Page 193
6.14 Some Historical Evidence......Page 195
6.15 Conclusion......Page 196
References......Page 197
7.1 Introduction......Page 199
7.2 The Conventional View of Central Bank Independence......Page 201
7.3.1 Independence and Conservatism......Page 202
7.3.2 Independence and Accountability......Page 208
7.3.3 Credibility and Removal of Independence......Page 210
7.4.1 Fixed Exchange Rates, Currency Boards, and Monetary Union......Page 212
7.4.2 Inflation Contracts and Targets......Page 213
7.4.3 Labor Market Institutions......Page 215
7.5.1 Central Bank Independence Is an Endogenous Variable......Page 217
7.5.2 National Inflation Cultures......Page 219
7.5.3 Political Interest Groups......Page 222
7.5.4 Legal System, Political System, and Factual CBI......Page 224
7.6 Conclusion......Page 229
References......Page 231
8.1 Introduction......Page 238
8.2 Designing Supervisory Governance: Hints from the Central Banking Literature on Monetary Policy......Page 241
8.3 Defining Independence and Accountability in Financial Supervision......Page 244
8.4.1 Sample and Methodology......Page 248
Overview......Page 249
Overview by criteria......Page 252
Overview by country groupings......Page 254
8.4.3 Impact of the Location and Comparison with Monetary Policy......Page 255
8.5.1 The Econometric Approach......Page 258
8.5.2 The Results......Page 263
8.6 Conclusions......Page 272
References......Page 275
Part III Transparency and Governance in Central Banking......Page 279
9.1 Introduction......Page 281
9.2 Theoretical Findings......Page 285
9.2.1 Cukierman and Meltzer (1986)......Page 286
Preferences......Page 289
Economic Transparency......Page 292
Control Errors......Page 295
9.2.2 Coordination......Page 296
9.2.3 Committees......Page 299
9.2.4 Learning......Page 301
9.2.5 Conclusion on Theory......Page 303
9.3.1 Policy Anticipation......Page 304
9.3.3 Macroeconomic Variables......Page 306
9.3.4 Credibility, Reputation, and Flexibility......Page 308
9.3.5 Cross-Country Comparisons......Page 309
9.4 Overall Conclusion......Page 310
References......Page 314
10.1 Introduction......Page 340
10.2 The Impact of Committees on Decision Making......Page 342
Information processing......Page 344
Insurance......Page 345
Free-riding......Page 346
Inertia......Page 349
“Hub-and-spoke” committees and rotation......Page 350
Instability of preferences and groupthink......Page 351
Avoiding information cascades......Page 353
Consensus or voting?......Page 354
10.2.3 Implications for Committee Design......Page 357
10.3.1 Clear Objectives and Independence......Page 358
10.3.2 The Structure of the Monetary Policy Meeting......Page 359
Appendix A......Page 372
References......Page 373
11.1 Introduction......Page 377
11.2.1 Trustworthiness in the Central Bank and Its Determinants......Page 381
11.2.2 Central Bank Signaling Costs and Trust......Page 384
11.3 Data and Econometric Specification......Page 386
11.4 Empirical Evidence......Page 392
11.5 Conclusions......Page 398
References......Page 399
Index......Page 413