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Inflation versus central bank independence? Banking regulation and financial stability in the US and Germany

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  • Vitols, Sigurt
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    Abstract

    Most recent discussion of the relationship between the banking system and macroeconomic performance have focused on the deegree of independence of the central bank as the key variable influencing the choice between inflation and unemployment. This paper argues that the stability of the financial system is a goal of central banks with at least as much priority as the other two goals, and that tight money policies implemented to achieve monetary stability may conflict with the goal of financial system stability; furthermore, the nature of regulation and underlying health of the financial system is a crucial factor influencing the extent of the monetary versus financial system stability tradeoff dilemma. The erosion of prudential regulation and increasing weakness of large segments of the financial system in the US, in large part due to arbitrage between competing regulatory authorities, has since the 1960s put the Federal Reserve Board in the dilemma of controlling inflation versus protecting financial system stability. The German Bundesbank in contrast has had a freer reign in monetary policy, since corporatist bank regulation including strict prudential standards and the prohibition of potential bank competitors has resulted in a stronger underlying financial structure. -- In jüngster Zeit hat sich die Debatte um den Zusammenhang zwischen dem Bankensystems und makroökonomischen Variablen - vor allem der Trade Off zwischen Inflation und Arbeitslosigkeit - uf den Grad der Unabhängigkeit der Zentralbank von der (Regierungs-)Politik konzentriet. In diesem Papier wird die These entwickelt, daß die Stabilität des Finanzsystems ein genauso hochrangiges Ziel von Zentralbanken ist wie die Geldwerstabilität und das Beschäftigugnsniveau. Das Erreichen des Ziels Geldwertstabilität durch eine straffe Geldpolitik kann das Ziel Finanzsystem-Stabilität gefährden. Das Ausmaß dieses Dilemmas wird durch die Effektivität der Regulierung und die Stärke der Finanzinstitute bestimmt. Die Unterminierung der Regulierung und die Schwächung von großen Segmenten des us-amerikanischen Finanzsystems durch arbitrage zwischen miteinander konkurrierenden Regulierungsbehörden hatte seit den sechziger Jahren die Federal Resever Board, die US-Zentralbank, vor die Wahl zwischen Geldwertstabilität und Finanzsystem-Stabilität gestellt. Im Gegensatz dazu hat die korporatistische Regulierung des duetschen Finanzsystems, die durch strenge Regeln und das Verbot potentiell mit den Kreditinstituten konkurierender Finazinstitute gekennzeichnet ist, zu einem stärkeren Finanzsystem geführt und so der Deutschen Bundesbank einen größeren Spielraum in der Geldpolitik gewährt.

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    Bibliographic Info

    Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Unit: Economic Change and Employment with number FS I 95-312.

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    Date of creation: 1995
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    Handle: RePEc:zbw:wzbece:fsi95312

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    9. Albert M. Wojnilower, 1980. "The Central Role of Credit Crunches in Recent Financial History," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 277-340.
    10. Joshua N. Feinman, 1993. "Reserve requirements: history, current practice, and potential reform," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 569-589.
    11. Maximilian J.B Hall, 2002. "Banking Regulation and Supervision in Japan," FMG Special Papers sp139, Financial Markets Group.
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