G-7 Central Banks and their relations with governments

ECB economists have a nice paper on the topic. It has a nice title – Dancing together at arm’s length? – The interaction of central banks with governments in the G7.

The paper fi rst reviews the objectives of and arrangements for central bank/government cooperation in the US, UK, Japan and Canada in areas such as monetary policy and its interlink with economic policy; foreign exchange operations and foreign reserve management; international cooperation; payment systems/ securities clearing and settlement systems; supervision, regulation and fi nancial stability; banknotes and coins; collection of statistics; and the role of fi scal agent for the government.

In parallel the paper looks into the objectives of and arrangements for cooperation between the ECB and relevant European counterparts, refl ecting the specifi c European institutional environment characterised by the absence of a ‘European government’. Following a comprehensive stocktaking of practices, the paper embarks on a comparison of existing arrangements, pointing to the similarities and differences among the fi ve surveyed central banks.

The broad results are:

An independent monetary policy function is at the heart of the institutional relationship between central banks and governments and has emerged as a consensus good practice globally. This paper shows that among the central banks surveyed, the ECB stands out in terms of independence, with its status protected by an international treaty that can
only be modifi ed by unanimous agreement of its signatories. This notwithstanding, the ECB is in a continuous dialogue with the EU bodies that set the framework for the economic policies of Member States in the euro area and in the European Union as a whole. In terms of central bank/government cooperation, the particular institutional set-up of the euro area has led to two different patterns. On the one hand, the self-restraint of euro area governments in exchange rate policy has allowed the ECB to assume a more dominant role than most national central banks.

The role of the ECB is comparatively strong in the fi eld of exchange rate policy and management and in international cooperation, again due to the lack of a strong economic policy counterpart. At the same time, as the ECB does not pursue an exchange rate target, the ECB is not an active participant in the exchange rate markets and has only intervened on two occasions. Also, the very high level of independence which the ECB enjoys for its monetary policy decisions contrasts with the statutes of the certain central banks surveyed, which contain – at least up to a certain extent and in very specifi c circumstances – provisions through which the government might exert infl uence.

However, this does not imply that all institutional features of the euro area comply with what academics and policy-makers would define as “state of the art”. The most striking example of a need to change the present institutional setting in the EU is fi  nancial stability, where currently no direct European competence exists. This is an area of ongoing policy refl ection and debate in the EU, whereby  a consensus has emerged to overhaul the current supervisory architecture and to enhance the role of the ECB in macro-prudential supervision. At the same time, the performance of the US and the UK, with totally different supervisory set-ups, during the fi nancial crisis shows that it is diffi cult to defi ne a benchmark for an “optimal” institutional solution in this area. This illustrates that the design of central bank statutes and functions needs to take close account of the general environment in which the central bank operates, in order to achieve the policy results that citizens expect.

You get to know about G-7 central banks in one paper. But to be honest, it pats the back of ECB a bit too much.

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