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Monetary Policy Regimes: a fragile consensus

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  • Peter Howells

    ()
    (School of Economics, University of the West of England)

  • Iris Biefang-Frisancho Mariscal

    (School of Economics, University of the West of England)

Abstract

The last fifteen years have seen the emergence of widespread consensus that optimum monetary policy is designed on the basis of three pillars: a short-term official rate of interest as the sole policy instrument and the placing of that instrument in the hands of a central bank which is (a) independent of government and (b) transparent in its decision-making. We take a critical look at each of these. In the first case, we focus attention on the failure of mainstream economics to recognise the choice of instrument and the implications of its adoption. In the case of independence we argue that he theoretical case for independence has been misunderstood and that it is not an essential requirement for successful policy. We also show that ‘independence’ is not best measured against a checklist of statutory characteristics. As regards ‘transparency’ our argument is slightly different, though we come to a similar conclusion. Unlike independence, ‘transparency’ does address a real problem for central banks. However, the evidence suggests that transparency is not the only, or even the best, solution. A variety of evidence tells us that agents can understand and anticipate the actions of the most secretive institutions.

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Bibliographic Info

Paper provided by Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol in its series Working Papers with number 0512.

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Length: 22 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:uwe:wpaper:0512

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Keywords: Monetary policy; central banks; independence; transparency;

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  1. Arestis, Philip & Howells, Peter, 1996. "Theoretical Reflections on Endogenous Money: The Problem with 'Convenience Lending.'," Cambridge Journal of Economics, Oxford University Press, vol. 20(5), pages 539-51, September.
  2. Eijffinger, S.C.W. & Geraats, P., 2002. "How Transparent are Central Banks?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-88701, Tilburg University.
  3. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics 20226, London School of Economics and Political Science, LSE Library.
  4. Alvaro Angeriz & Philip Arestis, 2007. "Monetary policy in the UK," Cambridge Journal of Economics, Oxford University Press, vol. 31(6), pages 863-884, November.
  5. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  6. Forder, James, 1998. "The case for an independent European central bank: A reassessment of evidence and sources," European Journal of Political Economy, Elsevier, vol. 14(1), pages 53-71, February.
  7. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Manchester School, University of Manchester, vol. 71(5), pages 478-497, 09.
  8. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
  9. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
  10. James Forder, 2003. "'Independence' and the founding of the Federal Reserve," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(3), pages 297-310, 08.
  11. Giuseppe Fontana & Ezio Venturino, 2003. "Endogenous Money: An Analytical Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(4), pages 398-416, 09.
  12. Kevin Ross, 2002. "Market Predictability of ECB Monetary Policy Decisions," IMF Working Papers 02/233, International Monetary Fund.
  13. Forder, James, 1998. "Central Bank Independence--Conceptual Clarifications and Interim Assessment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 307-34, July.
  14. Goodhart, Charles A E, 1994. "What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?," Economic Journal, Royal Economic Society, vol. 104(427), pages 1424-36, November.
  15. Stephen G. Cecchetti & Stefan Krause, 2002. "Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-60.
  16. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
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Cited by:
  1. Koutsobinas, Theodore, 2011. "Animal spirits, liquidity-preference and Keynesian behavioural macroeconomics: An intertemporal framework," MPRA Paper 43027, University Library of Munich, Germany.

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