IS THE CASE FOR CENTRAL BANK INDEPENDENCE DEAD? - ED BALLS AND ANNA STANSBURY DISCUSSED BY - Peterson Institute for International ...
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IS THE CASE FOR DISCUSSED BY
LAWRENCE SUMMERS
CENTRAL BANK AND
INDEPENDENCE DEAD? ADAM POSEN
PETERSON INSTITUTE FOR
ED BALLS INTERNATIONAL ECONOMICS
AND WASHINGTON, DC
ANNA STANSBURY APRIL 23, 2018
ALESINA & SUMMERS: THE 1990S CASE FOR INDEPENDENCE Source: Alesina and Summers (1993) 2
SINCE THE 1980S, MOST COUNTRIES INCREASED
CENTRAL BANK INDEPENDENCE
1
.8 CBI over time (advanced economies)
USA CHE
CAN
.6
EUR
AUS
1980s
DNK
.4
JPN GBR
SWE
NOR
.2
NZL
0
0 .2 .4 .6 .8 1
2003
Source: Balls, Howat and Stansbury (2018). 3
CBI data from Grilli, Masciandaro and Tabellini (1991) and Arnone, Laurens, Segalotto and Sommer (2007)
Euro area data point for 1980s is weighted average of the 1980s CBI of the 2003 Euro member statesBUT THE INFLATION-INDEPENDENCE
CORRELATION DISAPPEARED PRE-CRISIS
4
Average annual inflation, 2000-2008
Inflation and Central Bank Independence, 2000-2008
AUS
KOR
3
USA
NZL
CAN EUR
DNK
2
ISR NOR
GBR SWE
CHE
1 0
JPN
0 .2 .4 .6 .8 1
Central Bank Independence 2003, GMT measure
Source: Balls, Howat and Stansbury (2018). 4
CBI data from Arnone, Laurens, Segalotto and Sommer (2007); inflation data from World Bank WDIWHAT HAS CHANGED SINCE THE FINANCIAL
CRISIS?
Pre-crisis:
Consensus that central bank independence a good thing
Build-up of financial sector risks
Low and stable inflation
Post-crisis:
Consensus around central bank independence under pressure
New macroprudential responsibilities, tools and structures
Too-low inflation and zero lower bound
5PUBLIC AND POLITICAL CRITICISM
6ACADEMIC CRITICISM:
1/ POSEN CRITIQUE
“The impact of central bank independence on economic outcomes is highly
overrated…
...It’s not to say central bank independence wasn’t important… but it took place
against this background of a common effort across all central bankers to bring down
inflation…
…Central bank independence was as much a reflection of the effort and the
credibility gained as a cause.”
Adam Posen (2017). Speech at Bank of England “20 years on” conference.
7ACADEMIC CRITICISM:
2/ ALESINA CRITIQUE
“One argument put forward by Fischer and Debelle (1994) is that the policy goal,
say the target level of inflation, should be chosen by elected politicians, while the
Central Bank should have the independence of choosing the policy instruments more
appropriate to achieve that goal…
…This is a rather "minimalist" view of the meaning of Central Bank
independence”
Alberto Alesina and Andrea Stella (2011). “The Politics of Monetary Policy”.
Handbook of Monetary Economics
8ACADEMIC CRITICISM:
3/ BUITER CRITIQUE
“Central banks in most of the advanced economies have become too powerful…
…In particular, they have accrued a host of deeply political responsibilities and
powers.They have neither the legitimacy nor the capability or skills to discharge all
these responsibilities effectively.
I propose a return to narrow central banking.”
Willem Buiter (2014). “Central Banks: Powerful, Political, and Unaccountable?”
Journal of the British Academy
9ACADEMIC CRITICISM:
4/ SUMMERS CRITIQUE
“When the primary policy challenge for central banks was establishing credibility
that the printing press was under control, it was appropriate for them to jealously
guard their independence.
When the challenge is to accelerate, rather than brake, economies, more
cooperation with domestic fiscal authorities and foreign counterparts is
necessary”
Lawrence Summers (2016). “The Age of Secular Stagnation”, Foreign Affairs
10OUR RESEARCH HIGHLIGHTS TWO IMPORTANT
DIMENSIONS TO CBI
Operational independence:
the ability of the central bank to select and use monetary tools with
autonomy
Political independence:
the absence of possibility for political influence over the central bank
e.g.
Bank of England is operationally independent but not politically independent –
government sets inflation target
ECB and Fed are both operationally and politically independent
11ADVANCED ECONOMIES INCREASED
OPERATIONAL CBI (BUT NOT POLITICAL)
Operational Independence over time Political Independence over time
AUS
1
1
USA
CAN CHE
.8
.8
GBR
EUR
JPN
.6
.6
USA CHE
1980s
1980s
NZL DNK EUR
CAN
.4
NOR
.4
SWE
AUS DNK SWE
.2
.2
NOR
GBR
0 JPN NZL
0
0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1
2003 2003
Source: Balls, Howat and Stansbury (2018). 12
CBI data from Grilli, Masciandaro and Tabellini (1991) and Arnone, Laurens, Segalotto and Sommer (2007)
Euro area data point for 1980s is weighted average of the 1980s CBI of the 2003 Euro member statesONLY OPERATIONAL CBI MATTERED FOR
ADVANCED ECONOMIES IN 1970S/80S…
Inflation and Operational Independence, 1980s (AVPlot) Inflation and Political Independence, 1980s (AVPlot)
10
10
GRC
Average annual inflation, 1980s
Average annual inflation, 1980s
GRC
NOR
5
5
NOR
CHE
ITA PRT AUS
NZL PRT
SWE DNK NZL CHE DNK
LUX GBR CAN USA
AUS SWE
IRL ITA
0
USA LUX
0
FRA IRL GBR BEL FRA
FIN CAN DEU
ESP NLD
AUT ESP
DEU BEL
NLD FIN
-5
AUT
-5
JPN JPN
-.6 -.4 -.2 0 .2 .4 -.4 -.2 0 .2 .4
Operational Independence 1980s Political Independence 1980s
coef = -6.067239, se = 2.7798183, t = -2.18 coef = .83703529, se = 3.8915158, t = .22
… contrary to the Alesina critique
13…AND BY 2000S THEY ALL HAD HIGH
OPERATIONAL CBI AND LOW INFLATION
Inflation and Operational Independence, 1980s and 2000s
20
GRC
PRT
15
Average inflation
NZL
ITA
10
ESP
IRL
NOR AUS
SWE FRA
FIN GBR
DNK
CAN
USA
5
LUX BEL
AUT CHE DEU
NLD KOR USA AUS
JPN ISR CAN NOR GBR
NZL DNK EUR
SWE
0
JPN CHE
0 .2 .4 .6 .8 1
Operational Independence
1980s, fitted values 1980s
2000s
… suggesting that – notwithstanding the Posen critique – the 1980s/1990s case for operational 14
independence remainsBUT CRISIS HAS GIVEN CENTRAL BANKS
ADDITIONAL POWERS AND CHALLENGES
Macro-prudential policy
Can central banks manage these extra powers and responsibilities?
Or is this an area central banks should withdraw from? (Buiter)
Monetary-fiscal coordination
Does central bank independence make this impossible? (Summers)
15CRITERIA FOR REFORM:
WHEN DOES INDEPENDENCE MAKE SENSE?
When should a policy function be located in an independent institution?
Political incentive to “cheat”
Clearly-defined goal and effective accountability mechanism
No first-order distributional impact
No significant fiscal impact
When should that institution be the central bank?
No conflict with monetary policy
Relevant expertise in the central bank
16MONETARY POLICY
When should a policy function be located in an independent institution?
Political incentive to “cheat”
Clearly-defined goal and effective accountability mechanism
No first-order distributional impact
No significant fiscal impact
When should that institution be the central bank?
No conflict with monetary policy
Relevant expertise in the central bank
17SYSTEMIC RISK OVERSIGHT AND MACRO-
PRUDENTIAL POLICY
When should a policy function be located in an independent institution?
Political incentive to “cheat”
Clearly-defined goal and effective accountability mechanism
No first-order distributional impact
No significant fiscal impact
When should that institution be the central bank?
No conflict with monetary policy
Relevant expertise in the central bank
18IS BUITER RIGHT THAT CENTRAL BANKS SHOULD
GET OUT OF MACROPRUDENTIAL POLICY?
Macro-prudential policy and systemic risk management is clearly a risk
for both the credibility of central bank independence and democratic
accountability
Hard to define a clear goal
First order distributional impact
Risk of significant fiscal impact
Potential conflict with monetary policy
But in our paper we argue that operational independence can help
provide a solution
19OUR SOLUTION FOR MACRO-PRUDENTIAL
POLICY
Separate systemic risk oversight and macro-prudential policy.
A systemic risk oversight body should:
Be responsible for monitoring systemic risks and setting policy priorities
Include members from the central bank, regulators and the government
Be chaired by a government representative
A macro-prudential body should:
Be operationally independent from government
Bring together central bank and financial regulators
Be led by the central bank
Argues for a hybrid model between current Fed and Bank of England
20MONETARY-FISCAL POLICY COORDINATION
When should a policy function be located in an independent institution?
Political incentive to “cheat”
Clearly-defined goal and effective accountability mechanism
No first-order distributional impact
No significant fiscal impact
When should that institution be the central bank?
No conflict with monetary policy
21
Relevant expertise in the central bank
21IS SUMMERS RIGHT THAT MONETARY-FISCAL
COORDINATION AND CBI CONFLICT?
Lack of monetary-fiscal coordination was clearly a big problem post-crisis
“Fiscal policymakers, far from helping the economy, appeared to be actively
working to hinder it… Monetary policy … cannot carry the entire burden”
Ben Bernanke (2015)
“A stronger collective policy approach is urgently needed, focusing on a greater
use of fiscal and pro-growth structural policies, to strengthen growth and reduce
financial risks” Catherine Mann, OECD Chief Economist (2016)
“It is essential that fiscal policy supports the nascent recovery. Planned near-
term fiscal tightening will be a drag on growth”
IMF (2013) United Kingdom Article IV Consultation
In our paper we explore whether operational independence can help find a
solution
22ONE POSSIBLE SOLUTION FOR MONETARY-FISCAL
COORDINATION
One possible solution could be a fiscal open letter system
Once the interest rate goes below a pre-defined threshold close to the ZLB,
the central bank writes a quarterly open letter to the government, with its view on the
appropriate stance of fiscal policy to help meet the inflation target (and support growth)
This would meet three conditions:
Decision to send letter triggered by the central bank
Ability to send letter confined to the zero lower bound
Government retains control over stance and content of fiscal policy
But – still a risk that central bank may be drawn into politics?
23CONCLUDING REMARKS
The case for operational independence is not dead (if it was ever alive – Adam?)
But since the financial crisis independent central banks have become more
unpopular as their powers and responsibilities have increased.
Our paper argues that the solution must strike the right balance between
operational independence and effective political oversight.
No country has it right yet on macroprudential policy: the U.S. and U.K. can
learn from each other
24APPENDIX SLIDES
25CENTRAL BANK INDEPENDENCE OVER TIME IN
EMERGING ECONOMIES
1 CBI over time (emerging economies)
CRI
.8
.6
EGY HND PER TUR
1980s
LBN NIC
UGA PHL MLT ARG
KEN ETH
.4
BHS ZWE BOL
TZA THA NGA IND MEX ISL HUN
ZMB MYS CHN
BRB GHA ROM
ISR BWA COL IDN
VEN
SGP MAR KOR
.2
PAN PAK CHL
BRA POL
QAT ZAF NPL SRB SVN HRV BIH
URY MKD
0
0 .2 .4 .6 .8 1
2003
26POLITICAL AND OPERATIONAL INDEPENDENCE
OVER TIME IN EMERGING ECONOMIES
Political Independence over time Operational Independence over time
1
1
CRI
.8
.8
ZWE NGA
EGY MYS PER
ARG NIC
HND MEX BWA LBN CRI HUN
.6
.6
IND
UGA
ETH TZA
KEN
PHL HND TUR
1980s
1980s
NIC LBN
ISL TUR GHA COL
EGY PER MLT ROM BRB
.4
.4
THA ZMB CHN BOL
MAR MLT IDN
CHN
ETH BOL PAN SGP NPL CHL POL
COL ZWE ZMB THA BRA PHL ARG
.2
.2
ZAF ISR ROM ISL
ISR UGA VEN PAK
MEX VEN
BWA KEN MAR ZAF GHA PAK IDN HUN
TZA IND NGA NPL SGP CHL URY POL PAN QAT URY BRA
0
0
BRB QAT MYS
0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1
2003 2003
No IMF program 1993-2002 IMF program 1993-2002 No IMF program 1993-2002 IMF program 1993-2002
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