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Applying efficiency measurement techniques to central banks

  • Loretta J. Mester

This paper reviews the standard techniques of efficiency measurement, discusses some of the issues that arise in applying these standard techniques to central banks, and reviews some of the literature that has attempted to apply these techniques to central banking. The uniqueness of some of the activities of central banking, the difficulty in measuring some of the central banking outputs, and the complicated and multiple objectives pursued by central banks makes application of the standard techniques problematic. However, certain central bank activities do lend themselves to efficiency measurement, e.g., payment services provision.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-13.

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Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedpwp:03-13
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  1. Bauer, Paul W. & Hancock, Diana, 1993. "The efficiency of the Federal Reserve in providing check processing services," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 287-311, April.
  2. Joseph P. Hughes & Loretta J. Mester & Moon Choo-Geol, 2000. "Are scale economies in banking elusive or illusive? evidence obtained by incorporating capital structure and risk-taking into models of bank production," Proceedings 700, Federal Reserve Bank of Chicago.
  3. Loretta J. Mester, 1992. "Further evidence concerning expense preference and the Fed," Working Papers 92-4, Federal Reserve Bank of Philadelphia.
  4. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  5. Allen N. Berger & Loretta J. Mester, 2002. "Explaining the dramatic changes in performance of U.S. banks: technological change, deregulation, and dynamic changes in competition," Working Papers 01-6, Federal Reserve Bank of Philadelphia.
  6. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
  7. 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.
  8. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
  9. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon & Michael S. Pagano, 2002. "Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation and Financial Performance," Center for Financial Institutions Working Papers 02-18, Wharton School Center for Financial Institutions, University of Pennsylvania.
  10. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  11. Strong, John S, 1984. "The Use of Inputs by the Federal Reserve System: Comment," American Economic Review, American Economic Association, vol. 74(5), pages 1118-20, December.
  12. Edwards, Franklin R, 1977. "Managerial Objectives in Regulated Industries: Expense-Preference Behavior in Banking," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 147-62, February.
  13. Joseph P. Hughes & Loretta J. Mester, 1991. "A quality and risk-adjusted cost function for banks: evidence on the " too-big-to-fail" doctrine," Working Papers 91-21, Federal Reserve Bank of Philadelphia.
  14. Bauer, Paul W & Ferrier, Gary D, 1996. "Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments Processing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 1004-39, November.
  15. Joseph P. Hughes & Choon-Geol Moon, 1997. "Efficient Banking Under Interstate Branching," Departmental Working Papers 199609, Rutgers University, Department of Economics.
  16. Joseph Hughes & William Lang & Loretta Mester & Choon-Geol Moon, 2000. "Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking," Journal of Financial Services Research, Springer, vol. 18(1), pages 5-27, October.
  17. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
  18. Boyes, William J & Mounts, William Stewart & Sowell, Clifford, 1988. "The Federal Reserve as a Bureaucracy: An Examination of Expense-Preference Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 181-90, May.
  19. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc.
  20. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.).
  21. Loretta J. Mester, 1989. "Testing for Expense Preference Behavior: Mutual versus Stock Savings and Loans," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 483-498, Winter.
  22. Robert L. Hetzel, 2000. "The Taylor rule : is it a useful guide to understanding monetary policy?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-33.
  23. Boyd, John H, 1984. "The Use of Inputs by the Federal Reserve System: Comment," American Economic Review, American Economic Association, vol. 74(5), pages 1114-17, December.
  24. Shughart, William F, II & Tollison, Robert D, 1983. "Preliminary Evidence on the Use of Inputs by the Federal Reserve System," American Economic Review, American Economic Association, vol. 73(3), pages 291-304, June.
  25. R. Alton Gilbert & David C. Wheelock & Paul W. Wilson, 2002. "New evidence on the Fed's productivity in providing payments services," Working Papers 2002-020, Federal Reserve Bank of St. Louis.
  26. James Bohn & Diana Hancock & Paul Bauer, 2001. "Estimates of scale and cost efficiency for Federal Reserve currency operations," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 2-26.
  27. Toma, Mark, 1991. "The demise of the public-interest model of the Federal Reserve System : A review essay," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 157-163, February.
  28. Shughart, William F, II & Tollison, Robert D, 1984. "The Use of Inputs by the Federal Reserve System: Reply," American Economic Review, American Economic Association, vol. 74(5), pages 1121-23, December.
  29. Mester, Loretta J., 1991. "Agency costs among savings and loans," Journal of Financial Intermediation, Elsevier, vol. 1(3), pages 257-278, June.
  30. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
  31. Loretta J. Mester, 1990. "Traditional and nontraditional banking: an information-theoretic approach," Working Papers 90-3, Federal Reserve Bank of Philadelphia.
  32. Loretta J. Mester, 1989. "Owners versus managers: who controls the bank?," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 13-23.
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