The Changing Face of Central Banking: Evolutionary Trends since World War II (Studies in Macroeconomic History)

Central banks have emerged as the key players in national and international policy making. This book explores their evolution since World War II in 20 industrial countries. The study considers the mix of economic, political, and institutional forces that have affected central bank behavior and its relationship with government. The analysis reconciles vastly different views about the role of central banks in the making of economic policies. One finding is that monetary policy is an evolutionary process. Cover......Page 1 Half-title......Page 3 Series-title......Page 5 Title......Page 7 Copyright......Page 8 Dedication......Page 9 Contents......Page 11 Figures......Page 14 Tables......Page 16 Preface......Page 19 INTRODUCTION......Page 23 INFLATION THEN AND NOW......Page 25 GOVERNING STRUCTURES......Page 28 CONFLICTS AND CONFLICT RESOLUTION......Page 32 OBJECTIVES AND RESPONSIBILITIES IN MONETARY POLICY: FROM EXPERIMENTATION AND AUTONOMY TO ACCOUNTABILITY AND DISCLOSURE......Page 34 THE CENTRAL BANK AND THE STATE......Page 43 THE DOMAIN OF CENTRAL BANKING......Page 45 SUMMARY......Page 46 INTRODUCTION......Page 48 POLITICAL STRUCTURE AND CENTRAL BANK AUTONOMY......Page 49 THE ROLE OF GOVERNANCE AND CONTRACTS FOR CENTRAL BANKERS......Page 54 The Role of Fiscal Policy......Page 58 A Brief Detour to the Antipodes......Page 59 COMMON FEATURES IN MONETARY AND FISCAL POLICIES AND INDICATORS OF CENTRAL BANK PERFORMANCE......Page 60 Inflation and Inflation Persistence......Page 61 Credibility of Policy Regimes......Page 69 Caveats......Page 75 Interest Rates......Page 80 Central Bank Independence......Page 86 Real Economic Performance......Page 91 CENTRAL BANKS AND CONFLICTS WITH GOVERNMENT......Page 95 CREDIBILITY AND REPUTATION OF MONETARY POLICY......Page 97 THE FISCAL AND MONETARY POLICY NEXUS: DO WE NEED A CENTRAL BANK AT ALL?......Page 100 SUMMARY......Page 102 INTRODUCTION......Page 103 LEGACIES OF THE PAST......Page 104 FRIEDMAN’S HYPOTHESIS......Page 105 CEOs OF CENTRAL BANKS......Page 107 CASE STUDIES......Page 112 The Fed and the Tension between Personalities and Policies......Page 113 The Bank of Canada and the Directive......Page 122 The “Directive” in International Perspective......Page 128 The Bundesbank and the Preeminence of Policy......Page 131 Drawing Some Conclusions......Page 137 THE THREAT TO MONETARY POLICY IN THE TWENTY-FIRST CENTURY: FINANCIAL INSTABILITY......Page 140 Varieties of Shortsightedness in Monetary Policy......Page 145 SUMMARY......Page 149 INTRODUCTION......Page 150 VARIETIES OF REACTION FUNCTIONS......Page 152 Characterizing the Reaction Function......Page 155 Identifying the Central Bank’s Preferences......Page 158 Discretion in the Form of a Rule......Page 161 THE POLICY PARADOX......Page 167 Motivation......Page 169 Specification of the Forecast Function......Page 173 Specification of the Reaction Function......Page 178 Some Stylized Features of the Data......Page 186 Reaction Functions for Individual Countries......Page 191 Extensions to Basic Reaction Function Estimates......Page 197 Cross-Country Reaction Function Estimates......Page 206 SUMMARY......Page 213 INTRODUCTION......Page 215 RECONCILING THE ECONOMETRIC AND QUALITATIVE EVIDENCE......Page 218 THE EMERGENCE OF COMMON FEATURES IN MONETARY POLICY: THE TRIUMPH OF POLICIES?......Page 222 A HALF CENTURY OF EXPERIMENTATION......Page 226 Exchange Rate Pressure......Page 227 Fiscal Pressure......Page 232 Political Pressure......Page 237 AN ASSESSMENT......Page 240 SUMMARY......Page 241 INTRODUCTION......Page 242 HOW MUCH TO TALK? CENTRAL BANK SIGNALING AND CREDIBILITY......Page 245 THE MEANING OF ACCOUNTABILITY......Page 249 THE VALUE OF DISCLOSURE......Page 257 THE IMPORTANCE OF CONFLICT RESOLUTION PROCEDURES AND GOVERNANCE......Page 260 Governance and Central Bank Accountability......Page 262 MEASURING CENTRAL BANK ACCOUNTABILITY AND DISCLOSURE......Page 269 Indexes of Accountability and Disclosure......Page 278 Inflation Forecasts and Central Bank Communication Redux......Page 282 SUMMARY......Page 286 INTRODUCTION......Page 287 THE END OF PERSONALITIES AND THE EMERGENCE OF A FRAMEWORK FOR MONETARY POLICY......Page 289 Exchange Rate Regimes......Page 294 Money Growth Targets......Page 298 Inflation Targeting......Page 300 DISCLOSURE VERSUS FLEXIBILITY REDUX......Page 304 THE APPEAL OF “COMMUNICATION” AS AN INSTRUMENT OF MONETARY POLICY......Page 305 The Importance of Forecasts......Page 311 COMMUNICATING MONETARY POLICY......Page 316 PRACTICAL ISSUES WITH INFLATION TARGETS: THE CRUCIAL ROLE OF THE INSTITUTIONAL FRAMEWORK......Page 317 SUMMARY......Page 320 INTRODUCTION......Page 322 DE JURE OR DE FACTO AUTONOMY: DOES IT MATTER?......Page 323 WHITHER CENTRAL BANK PERSONALITIES?......Page 325 QUALITATIVE VERSUS QUANTITATIVE FORMS OF ANALYSIS OF CENTRAL BANK PERFORMANCE......Page 326 TOWARD THE HOLY GRAIL IN MONETARY POLICY?......Page 328 Bibliography......Page 331 Index......Page 363 Cover 1 Half-title 3 Series-title 5 Title 7 Copyright 8 Dedication 9 Contents 11 Figures 14 Tables 16 Preface 19 1 The Institutional Make-up and Evolution of Central Bank–Government Relations: An Introduction 23 INTRODUCTION 23 INFLATION THEN AND NOW 25 GOVERNING STRUCTURES 28 CONFLICTS AND CONFLICT RESOLUTION 32 OBJECTIVES AND RESPONSIBILITIES IN MONETARY POLICY: FROM EXPERIMENTATION AND AUTONOMY TO ACCOUNTABILITY AND DISCLOSURE 34 THE CENTRAL BANK AND THE STATE 43 THE DOMAIN OF CENTRAL BANKING 45 SUMMARY 46 2 Legislation Alone Does Not a Central Bank Make: Political Structure, Governance, and Reputation in Monetary Policy 48 INTRODUCTION 48 POLITICAL STRUCTURE AND CENTRAL BANK AUTONOMY 49 THE ROLE OF GOVERNANCE AND CONTRACTS FOR CENTRAL BANKERS 54 The Role of Fiscal Policy 58 A Brief Detour to the Antipodes 59 COMMON FEATURES IN MONETARY AND FISCAL POLICIES AND INDICATORS OF CENTRAL BANK PERFORMANCE 60 Inflation and Inflation Persistence 61 Credibility of Policy Regimes 69 Caveats 75 Interest Rates 80 Central Bank Independence 86 Real Economic Performance 91 CENTRAL BANKS AND CONFLICTS WITH GOVERNMENT 95 CREDIBILITY AND REPUTATION OF MONETARY POLICY 97 THE FISCAL AND MONETARY POLICY NEXUS: DO WE NEED A CENTRAL BANK AT ALL? 100 SUMMARY 102 3 Central Bank Personalities and Monetary Policy Performance 103 INTRODUCTION 103 LEGACIES OF THE PAST 104 FRIEDMAN’S HYPOTHESIS 105 CEOs OF CENTRAL BANKS 107 CASE STUDIES 112 The Fed and the Tension between Personalities and Policies 113 The Bank of Canada and the Directive 122 The “Directive” in International Perspective 128 The Bundesbank and the Preeminence of Policy 131 Drawing Some Conclusions 137 THE THREAT TO MONETARY POLICY IN THE TWENTY-FIRST CENTURY: FINANCIAL INSTABILITY 140 Varieties of Shortsightedness in Monetary Policy 145 SUMMARY 149 4 Econometric Analysis of Central Bank Behavior: An Evolutionary Approach 150 INTRODUCTION 150 VARIETIES OF REACTION FUNCTIONS 152 Characterizing the Reaction Function 155 Identifying the Central Bank’s Preferences 158 Discretion in the Form of a Rule 161 THE POLICY PARADOX 167 NEW ESTIMATES OF CENTRAL BANK REACTION FUNCTIONS: SPECIFICATION AND ECONOMETRIC CONSIDERATIONS 169 Motivation 169 Specification of the Forecast Function 173 Specification of the Reaction Function 178 EMPIRICAL EVIDENCE 186 Some Stylized Features of the Data 186 Reaction Functions for Individual Countries 191 Extensions to Basic Reaction Function Estimates 197 Cross-Country Reaction Function Estimates 206 SUMMARY 213 5 Contrasting Quantitative and Qualitative Assessments of Central Bank Behavior and the Evolution of Monetary Policies 215 INTRODUCTION 215 RECONCILING THE ECONOMETRIC AND QUALITATIVE EVIDENCE 218 THE EMERGENCE OF COMMON FEATURES IN MONETARY POLICY: THE TRIUMPH OF POLICIES? 222 A HALF CENTURY OF EXPERIMENTATION 226 Exchange Rate Pressure 227 Fiscal Pressure 232 Political Pressure 237 AN ASSESSMENT 240 SUMMARY 241 6 Accountability, Disclosure, and Conflict Resolution 242 INTRODUCTION 242 HOW MUCH TO TALK? CENTRAL BANK SIGNALING AND CREDIBILITY 245 THE MEANING OF ACCOUNTABILITY 249 THE VALUE OF DISCLOSURE 257 THE IMPORTANCE OF CONFLICT RESOLUTION PROCEDURES AND GOVERNANCE 260 Governance and Central Bank Accountability 262 MEASURING CENTRAL BANK ACCOUNTABILITY AND DISCLOSURE 269 Indexes of Accountability and Disclosure 278 Inflation Forecasts and Central Bank Communication Redux 282 SUMMARY 286 7 Inflation Targets versus Other Inflation Control Measures: Two Sides of the Same Coin? 287 INTRODUCTION 287 THE END OF PERSONALITIES AND THE EMERGENCE OF A FRAMEWORK FOR MONETARY POLICY 289 EXCHANGE RATE REGIMES, MONEY, INFLATION, AND TARGETING: WHICH ONE IS A COHERENT POLICY FRAMEWORK? 294 Exchange Rate Regimes 294 Money Growth Targets 298 Inflation Targeting 300 DISCLOSURE VERSUS FLEXIBILITY REDUX 304 THE APPEAL OF “COMMUNICATION” AS AN INSTRUMENT OF MONETARY POLICY 305 The Importance of Forecasts 311 COMMUNICATING MONETARY POLICY 316 PRACTICAL ISSUES WITH INFLATION TARGETS: THE CRUCIAL ROLE OF THE INSTITUTIONAL FRAMEWORK 317 SUMMARY 320 8 The Changing Face of Central Banking: Epilogue 322 INTRODUCTION 322 DE JURE OR DE FACTO AUTONOMY: DOES IT MATTER? 323 WHITHER CENTRAL BANK PERSONALITIES? 325 QUALITATIVE VERSUS QUANTITATIVE FORMS OF ANALYSIS OF CENTRAL BANK PERFORMANCE 326 TOWARD THE HOLY GRAIL IN MONETARY POLICY? 328 Bibliography 331 Index 363 Central banks have emerged as the key players in national and international policy making. This book explores their evolution since World War II in 20 industrial countries. The study considers the mix of economic, political and institutional forces that have affected central bank behaviour and its relationship with government. The analysis reconciles vastly different views about the role of central banks in the making of economic policies. One finding is that monetary policy is an evolutionary process. This book explores the evolution of central banks since World War II in 20 industrial countries. The study considers the mix of economic, political, and institutional forces that have affected central bank behavior and its relationship with government