Evolution of central bak governance around the world

Christopher Crowe and Ellen Meade have written a nice paper on the topic. 

In this article, we survey and quantify the trends in two major areas of central bank governance: independence and transparency. We document the steady number of industrial and developing countries over the past 10 to 15 years and discuss the effects of these aspects of governance on inflation. We also touch on another aspect of governance that has received attention more recently in key industrial countries: committee structure and decision making.

 

It is a useful paper looking at various aspects of central banking – independence, transparency, communications and decision making. 

The authors arrive at four trends: 

First, central banks have sought a credible source of nominal price stability to replace the Bretton Woods system of fixed exchange rates that ended in the early 1970s. Discretionary policymaking in the hands of independent technocrats, rather than politicians, has gradually emerged. Policy reforms have therefore sought to buttress central bankers’ independence, to make them suitably accountable, and to allow market participants to discern their intentions. 

The second trend is the growing importance of global financial markets, particularly for medium-sized industrial economies and the major emerging market economies. Independent central banks with clear policy mandates, good communication strategies, and market-savvy, technocratic, management teams can reassure the markets and reduce the economic cost of political crises or mistakes.  

A third trend involves changes in the international order. The collapse of  communism and the promise of European Union accession in eastern European countries, combined with increased pressure for reform in other emerging markets following the financial crises of the 1990s, created a demand for new institutional forms. International financial institutions have also encouraged the rapid diffusion of “best practice.” 

Finally, the easier availability of information, due to the Internet and other technical innovations, has created new incentives for central banks, particularly for improved communication.  

In the end they say: 

 

This renewed focus on the central banker and the central bank represents a return to questions posed by Walter Bagehot ([1873] 1915) in the nineteenth century. An entire chapter of his book  Lombard Street  deals with central bank  management and decision making. The issues raised there will be familiar to the modern reader: preserving accountability while insulating central bankers from political interference; ensuring central bankers devote their attention to their official duties; calculating the optimal size for decision-making committees; and obtaining financial sector representation in central bank decision making while preventing capture of the central bank by the financial sector. While we chart the evolution of central bank governance in the recent past, it is useful to remember the vintage of the literature’s central concerns. We offer “old wine in new bottles” without apology. 

Well it was not just Bagehot but Ricardo who understood the importance of central bank independence as early as 1824. I will not be surprised to read some other economist in even earlier times saying something similar.  

Anyways a useful paper by Crowe and Meade. 

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