Central Bank Legal Frameworks in the Aftermath of the Global Financial Crisis

Perhaps one of the more important papers on central banking.

There is a lot of research on how and whether central bank objective functions have changed or the independence. But there is hardly any research on the most important thing that drives central banks at the first place: Their legislation, saw in India’s demonetisation how central bank law is so crucial to understanding monetary affairs.

It is written by Ashraf Khan of IMF and looks at how central bank legislations have changed post the financial crisis.

Drawing on the 2016 update of the IMF’s Central Bank Legislation Database, this paper examines differences in central bank legal frameworks before and after the Global Financial Crisis. Examples from select countries show that many central bank laws have undergone changes in objectives, decision-making, accountability, and data collection. A wider cross-country survey illustrates the common occurrence of price stability in central bank objectives, and varying practices in defining financial stability, “independence” versus “autonomy,” and who within a central bank determines monetary policy. The highlighted facts illustrate the uses of the database and could be a starting point for further analyses.

Even small changes in the central bank legislation should be keenly watched. There is usually a larger political economy game at play behind these small changes and the intent is much larger than initially thought. Moreover, the impact may be seen many years later as we see in case of Section 7 (1) in RBI Act.

Thus, instead of just focusing on usual literature on inflation/employment or central bank independence, we should look at the legislation and the changes.

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