Central Bank Independence and Macro-prudential Regulation.

By: Valencia, FabianContributor(s): Ueda, KenichiMaterial type: TextTextSeries: IMF Working PapersPublisher: Washington : International Monetary Fund, 2012Copyright date: ©2012Description: 1 online resource (28 pages)Content type: text Media type: computer Carrier type: online resourceISBN: 9781475581171Subject(s): Banks and banking, Central | Banks and bankingGenre/Form: Electronic books.Additional physical formats: Print version:: Central Bank Independence and Macro-prudential RegulationDDC classification: 332.1/52 LOC classification: HG1811 -- .U33 2012ebOnline resources: Click to View
Contents:
Cover -- Contents -- I: Introduction -- II: Model Setup -- III: Social Planner Benchmark -- IV: Time inconsistency in a dual-mandate central bank -- V: Separation of Objectives Achieves Social Optimum -- VI: The role of political independence -- A: Non-Independent Central Bank and Independent Macro-prudential Regulator -- B: Non-Independent Macro-prudential Regulator and Independent Central Bank -- VII: Welfare Comparisons -- VIII: Conclusions -- References -- Appendices -- I: Non-Independent Single Authority -- II: Distortionary Macro-prudential Regulation -- List of Tables -- 1 Welfare Loss Across Institutional Arrangements.
Summary: We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.
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Cover -- Contents -- I: Introduction -- II: Model Setup -- III: Social Planner Benchmark -- IV: Time inconsistency in a dual-mandate central bank -- V: Separation of Objectives Achieves Social Optimum -- VI: The role of political independence -- A: Non-Independent Central Bank and Independent Macro-prudential Regulator -- B: Non-Independent Macro-prudential Regulator and Independent Central Bank -- VII: Welfare Comparisons -- VIII: Conclusions -- References -- Appendices -- I: Non-Independent Single Authority -- II: Distortionary Macro-prudential Regulation -- List of Tables -- 1 Welfare Loss Across Institutional Arrangements.

We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.

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Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2018. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.

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