Abstract
Over the last decade, the legal and institutional frameworks governing central banks and financial market regulatory authorities throughout the world have undergone significant changes. This has created a new interest in better understanding the roles played by organisational structures, accountability, and transparency in increasing the efficiency and effectiveness of central banks in achieving their objectives and ultimately yielding better economic outcomes. Although much has been written pointing out the potential role that an institutional form can play in central bank performance, little empirical work has been done to investigate the hypothesis that institutional form is related to performance. This paper attempts to help fill this void.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Our paper is related to Lybek (1999), which examines central bank autonomy, inflation, and economic growth in countries of the former Soviet Union. He was unable to do much in the way of statistical testing because not enough time had passed since the establishment of these new central banks.
See, for example, Tuladhar (2005), Sibert (2003), Lybek (2002), McNamara (2002), Healey (2001), Amtenbrink (1999), Maier (2007), and Caprio and Vittas (1995).
Although monetary policy can affect only prices in the long run and cannot create output, price stability is a necessary condition for the economy to reach its full growth potential. In the US, the Federal Reserve Act specifies three goals for Fed monetary policy: maximum employment, stable prices, and moderate long-term interest rates. Achievement of the third goal is expected to follow if the first two goals are achieved; hence, the Fed is usually spoken of as having a dual mandate. Other central banks, for example, Japan and New Zealand, have price stability as the sole goal of monetary policy.
In their survey of 25 mostly European central banks, Frisell et al. (2007) found that 80% list formulation and implementation of monetary policy as a major responsibility, and 75% list oversight and regulation of the payments and settlement system; see also Barth et al. (forthcoming) and Healey (2001).
One of the earliest to do so was the Reserve Bank of New Zealand, which until 1989 was under the operational control of the Minister of Finance and since then has been independent. While there has been a trend toward greater independence, the degree of independence varies among central banks. For example, in the US, the Federal Reserve's goals are delineated by the US. Congress in the Federal Reserve Act. The UK's inflation target is set by the Chancellor of the Exchequer. In contrast, the Riksbank and the Reserve Bank of Australia set their own inflation targets.
Tuladhar (2005) surveyed the differences in governing bodies of countries that have adopted inflation targeting to implement monetary policy. Eijffinger and Geraats (2002) and Frisell et al. (2007) surveyed differences in the institutional structures of the central banks in several, mainly European, countries.
The direction of causality could be better identified if we had time series data on central bank characteristics and those central bank characteristics varied over time. Unfortunately, such data were not available.
Results for statistical tests of equality of the set of coefficients across the country groups are discussed below. We also discuss two robustness tests that use alternative groupings of countries.
Note we also ran the regressions including a quadratic time trend (ie, trend and trend-squared variables) instead of the set of time dummy variables, with virtually no difference in results in terms of coefficient magnitudes or levels of significance.
In contrast to the performance measures based on economic outcomes that we use here, Hüpkes et al. (2006) discuss process-based performance criteria for financial supervisors.
Results using inflation squared to measure inflation performance differ little from the results using the absolute value of inflation.
We note Lybek's (1999) caution that there are measurement issues with the use of GDP as a measure of output in transition economies before privatisation was complete. He suggests that the GDP numbers may have exaggerated real output prior to privatisation and understated it after because of economic agents’ desire to evade taxes.
We drew on several sources for this variable including Cukierman (1994), Cukierman et al. (1992), Cukierman and Webb (1995), de Haan and Kooi (2000), de Haan and Van’t Hag (1995), Loungani and Sheets (1997), Mangano (1998), and the European Bank for Reconstruction and Development.
In calculating this variable for countries that do not specify a term length, we assume the term length is 10 years, which is longer than the term length for any country in our sample that specifies a term length.
The adjusted R2's for transition and developed countries are higher in the regressions using the Heritage monetary performance index than in the regressions using inflation as the performance measure.
These results are available from the authors upon request.
In the grouping of countries with German and Scandinavian legal origins, the supervision variable, indicating whether the central bank was involved in bank supervision as well as monetary policy, had to be excluded from the regressions since these roles are separated in these countries.
References
Alesina, A and Summers, LH . 1993: Central bank independence and macroeconomic performance: Some comparative evidence. Journal of Money, Credit and Banking 25 (2): 151–162.
Amtenbrink, F . 1999: The democratic accountability of central banks. Hart Publishing: Portland, OR.
Barth, JR, Caprio, G and Levine, R . (forthcoming): Bank regulation is changing: But for better or worse? Comparative Economic Studies.
Beach, WW and Kane, T . 2007: Methodology: Measuring the 10 economic freedoms. In: Kane, T, Holmes, KR and Anastatis M (eds). The 2007 Index of Economic Freedom, Heritage Foundation: Washington, DC.
Berg, C and Jonung, L . 1999: Pioneering price-level targeting: The Swedish experience, 1931–1937. Journal of Monetary Economics 43: 525–551.
Berger, H, de Haan, J and Eijffinger, S . 2001: Central bank independence: An update of theory and evidence. Journal of Economic Surveys 15 (1): 3–40.
Bhattacharya, S, Boot, A and Thakor, AV . 1998: The economics of bank regulation. Journal of Money, Credit and Banking 30 (4): 745–770.
Blinder, AS . 2004: The quiet revolution: Central banking goes modern. Yale University Press: New Haven, CT.
Caprio Jr., G and Vittas, D . 1995: Financial history: Lessons of the past for reformers of the present. Policy research working paper series, no. 1535.
Cukierman, A . 1994: Commitment through delegation, political influence and central bank independence. In: de Beaufort Wijnholds, JO, Eijffinger, SCW and Hoogduin, LH (eds). A Framework for Monetary Stability, Financial and Monetary Studies. Kluwer Academic Publisher: Boston.
Cukierman, A . 2005: Central bank independence and monetary policymaking institutions – past, present and future. Distinguished Lecture Delivered at the Annual Meeting of the Chilean Economic Society, Tel Aviv University, September.
Cukierman, A and Webb, SB . 1995: Political influence on the central bank: International evidence. The World Bank Economic Review 9 (3): 397–423.
Cukierman, A, Webb, SB and Neyapti, B . 1992: Measuring the independence of central banks and its effect on policy outcomes. The World Bank Economic Review 6 (3): 353–398.
de Haan, J and Kooi, WJ . 2000: Does central bank independence really matter? New evidence for developing countries using a new indicator. Journal of Banking & Finance 24: 643–664.
de Haan, J and Van’t Hag, GJ . 1995: Variation in central bank independence across countries: Some provisional empirical evidence. Public Choice 85: 331–351.
Eijffinger, SCW and Geraats, PM . 2002: How transparent are central banks? CEPR discussion paper 3188.
Fischer, S . 1994: Modern central banking. In: Capie, F, Goodhart, C and Fischer, S (eds). The Future of Central Banking: The Tercentenary Symposium of the Bank of England, Chapter 2, Cambridge University Press: Cambridge, UK.
Flannery, M . 1996: Financial crises, payment system problems, and discount window lending. Journal of Money, Credit and Banking 28 (4): 273–305.
Frisell, L, Roszbach, K and Spagnolo, G . 2007: Governing the governors: A clinical study of central banks. Working paper, Riksbank.
Fry, MJ, Kilato, I, Roger, S, Senderowicz, K, Shepard, D, Solis, F and Trundle, J . 1999: Payment systems in global perspective. Routledge: New York.
Hayo, B and Hefeker, C . 2007: Does central bank independence cause low inflation? A skeptical view. Working paper presented at the Central Bank of Hungary, May 2007.
Healey, J . 2001: Financial stability and the central bank: International evidence. In: Brealey, RA, Clark, A, Goodhart, C, Healey, J, Hoggarth, G, Llewellyn, DT, Shu, C, Sinclair, P and Soussa, F (eds). Financial Stability and Central Banks: A Global Perspective. Routledge: New York.
Hetzel, RL . 2000: The Taylor rule: Is it a useful guide to understanding monetary policy? Federal Reserve Bank of Richmond 86: 1–33.
Hüpkes, E, Quintyn, M and Taylor, MW . 2006: Accountability arrangements for financial sector regulators. IMF Economic Issues 39, Washington, DC.
La Porta, R, Lopez-de-Silanes, F and Shleifer, A . (forthcoming): The economic consequences of legal origins. Journal of Economic Literature.
La Porta, R, Lopez-de-Silanes, F, Shleifer, A and Vishny, R . 1999: The quality of government. Journal of Law, Economics, and Organization 15: 222–279.
Loungani, P and Sheets, N . 1997: Central bank independence, inflation, and growth in transition economics. Journal of Money, Credit and Banking 29 (3): 381–399.
Lybek, T . 1999: Central bank autonomy, and inflation and output performance in the Baltic States, Russia, and other countries of the former Soviet Union, 1995–97. IMF working paper 99/4, International Monetary Fund: Washington. Also published in Russian and East European Finance and Trade 35(6): 7–44.
Lybek, T . 2002: Central bank autonomy, accountability, and governance: Conceptual framework. Paper presented at the 2002 IMF Seminar on Current Developments in Monetary and Financial Law, Washington, DC.
Lybek, T and Morris, J . 2004: Central bank governance: A survey of boards and management. IMF working paper no. 04/226.
Maier, P . 2007: Monetary policy committees in action: Is there any room for improvement? Working paper presented at the Central Bank of Hungary, May 2007.
Mangano, G . 1998: Measuring central bank independence: A tale of subjectivity and of its consequences. Oxford Economic Papers 50: 468–492.
McNamara, KR . 2002: Rational fictions: Central bank independence and the social logic of delegation. West European Politics 25 (1): 47–76.
Mester, LJ . 2003: Applying efficiency measurement techniques to central banks. Federal Reserve Bank of Philadelphia working paper no. 03-13, July.
Orphanides, A . 2003: Monetary policy evaluation with noisy information. Journal of Monetary Economics 50 (April): 605–631.
Royal Decree. (2001): Norway, 29 March 2001, http://www.norges-bank.no/english/nb/legislation/.
Sibert, A . 2003: Monetary policy committees: Individuals and collective reputations. Review of Economic Studies 70 (July): 649–665.
Taylor, JB . 1999: The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank. Journal of Monetary Economics 43: 655–679.
Tuladhar, A . 2005: Governance structures and decision-making roles in inflation-targeting central banks. IMF working paper no. 05/183.
Acknowledgements
We thank the editor, an anonymous referee, participants at the 13th Dubrovnik Economic Conference at the Croatian National Bank, and participants at the Frontiers in Central Banking Conference at the Hungarian National Bank for helpful comments. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Philadelphia, the Board of Governors of the Federal Reserve System, or the Bank of Finland.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Hasan, I., Mester, L. Central Bank Institutional Structure and Effective Central Banking: Cross-Country Empirical Evidence. Comp Econ Stud 50, 620–645 (2008). https://doi.org/10.1057/ces.2008.36
Published:
Issue Date:
DOI: https://doi.org/10.1057/ces.2008.36