Comparative Central Banking and the Politics of Monetary Policy: The Relationship between Governments and Central Banks Must Be Balanced and Defined

By Meyer, Laurence | Business Economics, October 2001 | Go to article overview

Comparative Central Banking and the Politics of Monetary Policy: The Relationship between Governments and Central Banks Must Be Balanced and Defined


Meyer, Laurence, Business Economics


All central banks must steer a careful course between independence and accountability. There are four important mechanisms: legislative mandate, instrument independence, informal interactions with government, and government procedures to foster accountability. Inherent conflict between independence and accountability makes balance a crucial component of successful central banking. If this balance is not struck successfully and there is not a shared understanding of the roles of government and the central bank, it is unlikely that stabilization policy will be successful. Transparency is also important for credibility and accountability.

I have a very specific topic: how the Fed balances independence and accountability. The answer is quite simple: carefully. I'll have something more to say about this balancing act, but first I would like to address a broader set of questions, especially in the context of international perspectives on the process of monetary policy formulation. I would like to pose a question--actually a set of three interrelated questions about comparative central banking. First, how similar or different is the practice of monetary policy across the central banks represented on the panel? Second, if practices are different, what accounts for the differences? And, third, what are the consequences of these differences for macro-economic performance?

Monetary policies may, of course, appear different because the circumstances faced by central banks differ around the world. That would especially be the case if there were important country-specific shocks. But it could also be the case if common shocks affected countries differently because of differences in the structure of the economies or even if initial conditions differed at the time they were hit by a common shock.

An even more interesting question--and a better lead-in to my assigned topic is: To what extent do different central banks respond differently to the same set of circumstances? Here's a wonderful game: Assume that the European Central Bank (ECB) governing council or the Bank of England's Monetary Policy Committee replaced the Federal Open Market Committee (FOMC) and made monetary policy in the United States--or vice versa. How would policy outcomes and, in turn, macroeconomic performance be affected?

Comparative Central Banking

Why would central banks differ in their response to a given set of economic circumstances? Let me offer a few possibilities. First, the central banks could have different objectives. How similar, for example, is the U.S. dual mandate--full employment and price stability--to the singular or, more precisely, hierarchical mandates for the ECB and the Bank of England? Under hierarchical mandates, price stability or low inflation is typically the principal objective, and other objectives can be pursued only once the inflation objective is met.

Second, there could be different strategies for achieving a given set of objectives. Of course, the most important factor in determining monetary policy strategy is likely to be the nature of the objectives themselves, so any differences in strategy may be related to the first question. At any rate, is a Taylor-rule type of approach--well aligned with a dual mandate and therefore a simple representation of the U.S. policy response-different in practice from the flexible inflation-targeting strategy of the Bank of England and the two-pillar strategy of the ECB? If so, what are the consequences of the differences in strategy for how central banks respond to unexpected developments?

Third, what determines how effective a central bank is in meeting its objectives, given its strategy? This takes us into the main subjects that this program will cover. To what extent does the process followed in making monetary policy shape the details and effectiveness of the outcomes? Does the nature of the governance and decision process matter?

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Comparative Central Banking and the Politics of Monetary Policy: The Relationship between Governments and Central Banks Must Be Balanced and Defined
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.