Does who chairs the Central Bank matter?

I came across this very interesting paper on central banking (HT: Ken Kuttner). There are many interesting facets of central banking – which anchor to choose, politics, independence, communications , legal aspects , monetary policy committees etc.

This paper written by Adam Posen and Kuttner looks at central bank chairs/heads. They evaluate whether markets care who heads the central bank. The abstract says it all:

This paper assesses the effects of central bank governor appointments on financial-market expectations of monetary policy. To measure these effects, we assemble a new dataset of appointment announcements from 15 countries and conduct an event-study analysis on exchange rates, bond yields, and stock prices. Our main findings are threefold. First, exchange rates and bond yields display a statistically significant response to the announcement of a new governor, especially when the appointee’s identity was not anticipated in advance. Second, the reactions are especially pronounced for central banks lacking either independence or a clear nominal anchor. Third, new governors are not generally perceived to lack credibility: there is no tendency for announcements to be associated with jumps in inflation expectations.

The study is only for advanced economies as emerging economies dataset is not readily available.

Financial markets react to news which is unexpected. Many a time a central bank appointment is well known in advance. So, the challenge is to find the unexpectedness in the appointment and exit of the central banker. This is what makes the study interesting.

The markets usually associate a new chair to be weak and wants to see him/her perform. However, authors find this is not the case as there is hardly any change in inflation expectations because of a new chair.

There are some interesting anecdotes in the paper.

For instance, there was a issue with appointment of Bernie Fraser as Reserve Bank of Australia head, which led to a huge rise in yields of bonds.

In Fraser’s case, the reason for the unusual reaction is clear. The likely choice of Fraser, the sitting Secretary of the Treasury, had been criticized in the weeks prior to the announcement as an appointment that would predispose the Reserve Bank of Australia (RBA) to yield to political pressure for more accommodative monetary policy.  And, while Fraser was widely viewed as the clear front-runner for the job, there was some speculation that Bob Hawke’s government would back away from its preferred candidate and appoint instead one of several viable candidates from within the RBA.

Ironically, Fraser went on to establish inflation targeting at the Reserve Bank of Australia. This underscores the point made previously, that the financial market’s reaction to an appointment need not correctly anticipate the policy changes occurring under a new governor.

This is quite interesting. Someone who was seen as a finance ministry appointment laid path for reforms at RBA. That is why I keep saying, what matters is what finance ministry/political parties think on economic/central banking reforms. The real change begins there. The case of Bundesbank getting independence because of political reasons is quite a story.

There is another anecdote:

When Klaus Liebscher left the presidency of the Austrian National Bank in 1998 to join the General Council of the European Central Bank, Financial Times quipped that he would have a “proper” job for the the first time since he took over as head of the Bank in 1995, noting that “some unkind critics have joked that his job could easily have been done by an incoming fax machine linked to the Bundesbank’s Frankfurt headquarters” (Hall, 1998).


A nice different kind of paper.


One Response to “Does who chairs the Central Bank matter?”

  1. Does who chairs the Central Bank matter? « Mostly Economics Economic Finance news Says:

    […] Original post: Does who chairs the Central Bank matter? « Mostly Economics […]

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