The Changing Face of Central Banking: Evolutionary Trends since World War II

The Changing Face of Central Banking: Evolutionary Trends since World War II

The Changing Face of Central Banking: Evolutionary Trends since World War II

The Changing Face of Central Banking: Evolutionary Trends since World War II

Synopsis

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. The emphasis on clarity of objectives, transparency of the decision-making process, and a clear understanding of the accountability of the central bank cannot be understood in isolation from the previous 50 years of policy making. The changing face of central banking, born out of the turbulence of the first half of the last century, nurtured by evolution in policies, defines the history of central banking in the second half of the twentieth century.

Excerpt

Throughout much of my professional career I have investigated economic issues that affect central banks directly or indirectly. My earliest involvement in this area dealt with conditions that lead to a hyperinflation and their termination, an extreme illustration of total subjugation of a central bank to government demands. By the early 1990s I became interested in the relationship between central banks and governments and the monetary policy choices made by these same authorities. Parallel literatures, with important contributions by Canadians, had emerged wherein a central bank either was an optimizing agent that could finetune the economy or behaved as a bureaucratic institution determined to maintain its special role via obfuscation and secrecy. At the same time political economists, and political science, claimed that central banks were constantly pressured by the political authorities to change their policies to facilitate reelection prospects or support partisan economic programs. Throughout, these various strands of the literature continued to grow, though some floundered by the late 1980s due to a lack of empirical support or an inability to address the issues that were the concern of the day.

Little did I know that, in 1993, a topic that lay largely dormant in economists' minds (but not in the minds of political scientists) would get its second wind so to speak. The catalyst was, of course, the publication of John Taylor's article on the Fed and its interest rate setting behavior. This led to an explosion of research into the “new” economics of central bank reaction functions. It was also when I undertook (initially with a colleague at Wilfrid Laurier University) a research program to investigate how central banks react to both the economic and political pressures they face. In a very real sense then, this study began in 1993.

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