Quasi independence of central banks Wenfa Ng figshare 08 Nov 2016.pdf (204.18 kB)
Quasi independence of most central banks: Implications for monetary policy in advanced countries and beyond
Around the world, central banks
are the gatekeepers of a country’s financial system, ensuring the smooth flow
of liquidity across various sectors of the economy where demand for financing
projects or business is met with money at a price preferably tuned to the
fundamentals of the economy. What is described is the regulatory role of a
modern central bank, the most quintessential example of which is the Federal
Reserve System of the U.S. But there is also an equally important policy
dimension to central banking, the setting of the direction and specifics of
monetary policy, the benchmark interest rate, on which other interest rates for
banking and housing loan is tied. Economic policy portfolio of most countries
can be classified broadly into fiscal and monetary, where the former is the framing
of an annual budget for the country through which the government in office aims
to implement its economic and policy vision. On the other hand, monetary policy
can be better understood as the ballast of the economy, where its adjustment
helps modulate possible gyrations in monthly manifestation of economic
fundamentals. Specifically, the benchmark interest rate (e.g., federal funds
rate in the U.S.) is set through a policy meeting amongst central bankers of
the Federal Reserve System banks known as the Federal Open Market Committee
meeting. As a guardian of the economy ensuring stable financial health,
enforcement of rules set by the legislative assembly together with monitoring
of liquidity flows meant that the central bank should be independent. Indeed,
the governance structure in most advanced countries have helped ensured that
the central bank is “independent” through a system which devolves the
government from most decisions on the central bank except for the appointment
of its governor or chairman. In advanced economies, the governor of the central
bank is confirmed by a public hearing presided by the legislative assembly
subcommittee on finance after being nominated for the post by the executive branch
of government: usually the Prime Minister or President. Thus, while the
candidate is likely to be proficient in banking and an experienced practicing
banker able to understand the implications of policy setting, the current
structure of nominating the central bank governor points to a possible bias
such as pushing forward someone with economic ideas convergent with that of the
government and most members of the legislative assembly. Is this possible “group
think” desirable from the perspective of tuning a runaway economy on track?
Would the governor of the central bank be able to do his job of maintaining
financial stability without pressure from the government? Is the current
governance structure independent or quasi-independent? And, most importantly,
what are the implications for policy setting in the advanced countries that may
ripple towards the developing and emerging economies? Interested researchers
may want to ponder and expand on these questions in their research.