Challenges in Central Banking: The Current Institutional Environment and Forces Affecting Monetary Policy

by Edited by Pierre L. Siklos , Martin T. Bohl , Mark E. Wohar

• ISBN13: 9780521199292
• ISBN10: 0521199298
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-04-12
• Publisher: Cambridge University Press

Summary

Changes in the field of central banking over the past two decades have been nothing short of dramatic. They include the importance of central bank autonomy, the desirability of low and stable inflation, and the vital role played by how central banks communicate their views and intentions to the markets and the public more generally. There remains considerable diversity nevertheless in the institutional framework affecting central banks, the manner in which the stance of monetary policy is determined and assessed, and the forces that dictate the conduct of monetary policy more generally. The global financial crisis, which began in the United States in 2007, only serves to highlight further the importance of central bank policies. The aim of this volume is to take stock of where we are in the realm of the practice of central banking and considers some of the implications arising from the ongoing crisis.

Table of Contents

List of Tables, Figures, and Appendices	p. xii
List of Contributors	p. xv
Preface	p. xvii
The State of Play in Central Banking and the Challenges to Come	p. 1
Introduction	p. 1
Part I: Past, Present, and Future in the Conduct of Monetary Policy	p. 2
Part II: The Scope of Central Banking Operations and Central Bank Independence	p. 6
Part III: Transparency and Governance in Central Banking	p. 11
Past, Present, and Future in the Conduct of Monetary Policy
Is the Time Ripe for Price-Level Path Stability?	p. 21
Introduction	p. 22
The Case for Price-Level Stability	p. 27
The Optimality of Price-Level Stability in the New Keynesian Model	p. 27
Price-Level Stability, Zero Lower Bound, and Deflationary Spirals	p. 34
Going Beyond the Basic New Keynesian Model	p. 36
Two Objections to PLPS	p. 39
Unrealistic Reliance on Credibility	p. 40
Uncertainty and Price-Level Stability	p. 45
Conclusions	p. 46
The Principal-Agent Approach to Monetary Policy Delegation	p. 52
Introduction	p. 52
Background, History, and Context	p. 55
Time Inconsistency, Discretion, and Central Banker Contracts	p. 57
Commitment and Optimal Policy	p. 58
Consistent Policy	p. 59
Explicit Contracts as a Remedy for Time Inconsistency	p. 59
Contracts and the Selfish Central Banker	p. 62
Selected Literature Review	p. 63
Solutions to Inconsistency of Optimal Plans	p. 63
Monetary Policy under Contracts and Incomplete Information	p. 69
Conclusion	p. 75
Implementing Monetary Policy in the 2000s: Operating Procedures in Asia and Beyond	p. 83
Introduction	p. 83
The Institutional Aspects of Monetary Policy Decisions	p. 86
The Operational Objectives of Monetary Policy Implementation	p. 92
Demand for Reserves	p. 98
Supply of Reserves	p. 104
Standing Facilities: Evolving Roles	p. 104
Discretionary Operations	p. 109
Putting the Pieces Together	p. 113
Concluding Remarks: And the Evolution Continues	p. 114
The Scope of Central Banking Operations and Central Bank Independence
Analysis of Financial Stability	p. 121
Introduction: The Financial Stability Role of Central Banks	p. 121
Historical Development of the Financial Stability Role of Central Banks	p. 122
The Functions of a Central Bank in the Provision of Financial Stability	p. 127
Recent Challenges to the Financial Stability Role of Central Banks	p. 130
Is There a Theoretical Basis for the Conduct of Financial Stability?	p. 133
Conclusions	p. 141
National Central Banks in a Multinational System	p. 146
Introduction	p. 146
Monetary Stability	p. 147
Financial Stability	p. 148
Failure Through Loss of Liquidity	p. 149
Internationalization and Classic LOLR	p. 152
An International LOLR?	p. 156
Failure Through Loss of Capital	p. 156
Dealing with Failure	p. 159
Cross-Border Institutional Structures that Renationalize the Problem	p. 162
Cross-Border Institutional Structures with Joint Responsibility	p. 165
Adequate Powers	p. 166
Preventing Problems	p. 169
Cross-Border Financial Markets	p. 173
Some Historical Evidence	p. 175
Conclusion	p. 176
The Complex Relationship between Central Bank Independence and Inflation	p. 179
Introduction	p. 179
The Conventional View of Central Bank Independence	p. 181
Problems with the Conventional View	p. 182
Independence and Conservatism	p. 182
Independence and Accountability	p. 188
Credibility and Removal of Independence	p. 190
Alternatives to Central Bank Independence	p. 192
Fixed Exchange Rates, Currency Boards, and Monetary Union	p. 192
Inflation Contracts and Targets	p. 193
Labor Market Institutions	p. 195
Alternative Explanations of Low Inflation	p. 197
Central Bank Independence Is an Endogenous Variable	p. 197
National Inflation Cultures	p. 199
Political Interest Groups	p. 202
Legal System, Political System, and Factual CBI	p. 204
Conclusion	p. 209
Independence and Accountability in Supervision Comparing Central Banks and Financial Authorities	p. 218
Introduction	p. 218
Designing Supervisory Governance: Hints from the Central Banking Literature on Monetary Policy	p. 221
Defining Independence and Accountability in Financial Supervision	p. 224
Governance of Supervisory Function: Main Findings	p. 228
Sample and Methodology	p. 228
Main Findings	p. 229
Impact of the Location and Comparison with Monetary Policy	p. 235
The Determinants of Supervisory Governance	p. 238
The Econometric Approach	p. 238
The Results	p. 243
Conclusions	p. 252
Transparency and Governance in Central Banking
The Economic Impact of Central Bank Transparency: A Survey	p. 261
Introduction	p. 261
Theoretical Findings	p. 265
Cukierman and Meltzer (1986)	p. 266
Coordination	p. 276
Committees	p. 279
Learning	p. 281
Conclusion on Theory	p. 283
Empirical Evaluations of Transparency	p. 284
Policy Anticipation	p. 284
Synchronization of Forecasts	p. 286
Macroeconomic Variables	p. 286
Credibility, Reputation, and Flexibility	p. 288
Cross-Country Comparisons	p. 289
Overall Conclusion	p. 290
How Central Banks Take Decisions: An Analysis of Monetary Policy Meetings	p. 320
Introduction	p. 320
The Impact of Committees on Decision Making	p. 322
The Benefits of Committee Decision Making	p. 324
The Costs of Committee Decision Making	p. 326
Implications for Committee Design	p. 337
Monetary Policy Committees in Practice	p. 338
Clear Objectives and Independence	p. 338
The Structure of the Monetary Policy Meeting	p. 339
Conclusions	p. 352
Institutional Rules and the Conduct of Monetary Policy: Does a Central Bank Need Governing Principles?	p. 357
Introduction	p. 357
The "Wisdom of Men" Versus Rules	p. 361
Trustworthiness in the Central Bank and Its Determinants	p. 361
Central Bank Signaling Costs and Trust	p. 364
Data and Econometric Specification	p. 366
Empirical Evidence	p. 372
Conclusions	p. 378
Index	p. 393
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