Central Bank Independence and Macro-Prudential Regulation
AbstractWe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 12/101.
Date of creation: 01 Apr 2012
Date of revision:
Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-BAN-2012-05-15 (Banking)
- NEP-CBA-2012-05-15 (Central Banking)
- NEP-MAC-2012-05-15 (Macroeconomics)
- NEP-MON-2012-05-15 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vasco Cúrdia & Michael Woodford, 2009.
"Credit frictions and optimal monetary policy,"
BIS Working Papers
278, Bank for International Settlements.
- Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
- Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
- Ioannidou, V. & Ongena, S. & Peydro, J.L., 2009. "Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment," Discussion Paper 2009-31 S, Tilburg University, Center for Economic Research.
- Jiminez, G. & Ongena, S. & Saurina, J., 2007.
"Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?,"
2007-75, Tilburg University, Center for Economic Research.
- Jiménez, Gabriel & Ongena, Steven & Peydró-Alcalde, José Luis & Saurina, Jesús, 2007. "Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk?," CEPR Discussion Papers 6514, C.E.P.R. Discussion Papers.
- Javier Bianchi, 2010. "Credit Externalities: Macroeconomic Effects and Policy Implications," American Economic Review, American Economic Association, vol. 100(2), pages 398-402, May.
- Paolo Angelini & Sergio Nicoletti-Altimari & Ignazio Visco, 2012. "Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs," Questioni di Economia e Finanza (Occasional Papers) 140, Bank of Italy, Economic Research and International Relations Area.
- Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
- Arnone, Marco & Romelli, Davide, 2013. "Dynamic central bank independence indices and inflation rate: A new empirical exploration," Journal of Financial Stability, Elsevier, vol. 9(3), pages 385-398.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).
If references are entirely missing, you can add them using this form.