This page intentionally left blank CHALLENGES IN CENTRAL BANKING Changes in the field of central banking over the past two decades have been nothing short of dramatic Moreover, they have spanned the globe They include the importance of central bank autonomy, the desirability of low and stable inflation, and the vital role played by how central banks communicate their views and intentions to the markets and the public more generally Nevertheless, there remains considerable diversity in the institutional framework affecting central banks, the manner in which the stance of monetary policy is determined and assessed, and the forces that dictate the conduct of monetary policy more generally The global financial crisis, which began in the United States in 2007, only serves to highlight further the importance of central bank policies The aim of this volume is to take stock of where we are in the realm of the practice of central banking and to consider some of the implications arising from the ongoing crisis Pierre L Siklos is Professor of Economics and Director of the Viessman European Research Centre at Wilfrid Laurier University, Canada He is the managing editor of the North American Journal of Economics and Finance, author of The Changing Face of Central Banking (Cambridge University Press, 2002), and coeditor with Richard Burdekin of Deflation: Current and Historical Perspectives (Cambridge University Press, 2004) In 2008 Professor Siklos was named to the C.D Howe Institute’s Monetary Policy Council, became chairholder of the Bundesbank Foundation of International Monetary Economics at the Freie University Berlin, and became a Senior Fellow at the Centre for International Governance Innovation His research in macroeconomics emphasizes the study of inflation, central banks, and financial markets Martin T Bohl is Professor of Economics, Centre for Quantitative Economics, Westfaelische Wilhelms University Muenster From 1999 to 2006 he was a professor of finance and capital markets at the European University Viadrina Frankfurt (Oder), where he was also spokesman for the Ph.D program Capital Markets and Finance in the Enlarged Europe Professor Bohl focuses on monetary theory and policy as well as financial market research He has published in many international macroeconomics and finance journals and has been a visiting scholar at several universities in Europe and North America Mark E Wohar is the UNO CBA Distinguished Professor at the University of Nebraska– Omaha, where he is director of the Division of Economic and Financial Analysis Professor Wohar has published more than 85 refereed journal articles, including those in the American Economic Review, Journal of Finance, Review of Economics and Statistics, Economic Journal, and the Journal of International Economics He is an associate editor of the Journal of Economics and Applied Economics and serves on the editorial board of Economic Inquiry and on the Editor Council of the Review of International Economics The recipient of several awards for research excellence, his areas of investigation include domestic and international macroeconomics, international finance, monetary theory, and financial institutions Challenges in Central Banking The Current Institutional Environment and Forces Affecting Monetary Policy Edited by PI E R R E L S I KLO S Wilfrid Laurier University, Canada M A RT I N T B O H L University of Muenster M A R K E WO H A R University of Nebraska, Omaha CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521199292 © Cambridge University Press 2010 This publication is in copyright Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published in print format 2010 ISBN-13 978-0-511-77039-5 eBook (NetLibrary) ISBN-13 978-0-521-19929-2 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate From PLS to Nancy, James, and Patrick, as always From MTB to Melanie, Hannah, and Alexander From MEW to my parents, who have provided me with constant encouragement throughout my life Contents List of Tables, Figures, and Appendices page xii List of Contributors xv Preface xvii The State of Play in Central Banking and the Challenges to Come Pierre L Siklos, Martin T Bohl, and Mark E Wohar 1.1 1.2 1.3 1.4 Introduction Part I: Past, Present, and Future in the Conduct of Monetary Policy Part II: The Scope of Central Banking Operations and Central Bank Independence Part III: Transparency and Governance in Central Banking 11 PART I PA S T, P R E S E N T, A N D F U T U R E I N T H E C O N D U C T O F M O N E TA RY P O L I C Y Is the Time Ripe for Price-Level Path Stability? 21 Vitor Gaspar, Frank Smets, and David Vestin 2.1 2.2 2.3 2.4 Introduction The Case for Price-Level Stability 2.2.1 The Optimality of Price-Level Stability in the New Keynesian Model 2.2.2 Price-Level Stability, Zero Lower Bound, and Deflationary Spirals 2.2.3 Going Beyond the Basic New Keynesian Model Two Objections to PLPS 2.3.1 Unrealistic Reliance on Credibility 2.3.2 Uncertainty and Price-Level Stability Conclusions vii 22 27 27 34 36 39 40 45 46 viii Contents The Principal-Agent Approach to Monetary Policy Delegation Georgios E Chortareas and Stephen M Miller 52 3.1 3.2 3.3 52 55 3.4 3.5 Introduction Background, History, and Context Time Inconsistency, Discretion, and Central Banker Contracts 3.3.1 Commitment and Optimal Policy 3.3.2 Consistent Policy 3.3.3 Explicit Contracts as a Remedy for Time Inconsistency 3.3.4 Contracts and the Selfish Central Banker Selected Literature Review 3.4.1 Solutions to Inconsistency of Optimal Plans 3.4.2 Monetary Policy under Contracts and Incomplete Information Conclusion Implementing Monetary Policy in the 2000s: Operating Procedures in Asia and Beyond Corrinne Ho 4.1 4.2 4.3 4.4 4.5 4.6 Introduction The Institutional Aspects of Monetary Policy Decisions The Operational Objectives of Monetary Policy Implementation Demand for Reserves Supply of Reserves 4.5.1 Standing Facilities: Evolving Roles 4.5.2 Discretionary Operations 4.5.3 Putting the Pieces Together Concluding Remarks: And the Evolution Continues 57 58 59 59 62 63 63 69 75 83 83 86 92 98 104 104 109 113 114 PART II THE SCOPE OF CENTRAL BANKING OPERATIONS AND CENTRAL BANK INDEPENDENCE Analysis of Financial Stability Charles A E Goodhart and Dimitri P Tsomocos 121 5.1 5.2 121 5.3 Introduction: The Financial Stability Role of Central Banks Historical Development of the Financial Stability Role of Central Banks The Functions of a Central Bank in the Provision of Financial Stability 122 127 384 NE NT NA Nepal Netherlands Netherlands Antilles New Zealand Nicaragua Nigeria Norway Oman Pakistan Papua New Guinea Paraguay Peru Philippines Poland Portugal Qatar Romania Russia Saudi Arabia Senegal Sierra Leone PR PE PH PO PT QA + RO RU SA SE SL NZ NI NG NO OM PA PP Country code Country name Appendix A Continued 91− 92− CPI POP −03 92− −03 Real GDP 92− −03 91− NA −01 Nominal GDP 93− −98 −98 Nom ER 90–92 −99 −94 96–02 [91–92] [91–95] Lend 91− −98 95− 91− −98 MM Int rate Inflation Current account %GDP Real and nominal p.c GDP WEO forecasts GDP growth 385 US UU VE YE ZA ZI TU TR UG UR∗ , + UK SI SO SV SF SP SR SU SW ST TA TH TO + TT cpi −02 −03 93− −03 93− 92− pop rgdp −03 −97 −00 −03 92− −94 ngdp 03− −97 −01 92− [91], 93− ner 93− 94− −98 93− 91− lr 96− [92–94] 93− 91− 93− 91− MMR 94− 96− 97− −03 00− 92− pi ca rgdppc/gdppc gdpg Note: Data collected from March 2006 IFS CD-ROM ∗ Means raw data in % change format Filled cells indicate data limitations (year starting −, or – year ending) Otherwise, data are annual for the period 1990–2004, inclusive + means that the real GDP data are not 2000 = 100 but are production based, or indexed to 100 in a different year Variable Code Singapore Slovak R Slovenia South Africa Spain Sri Lanka Suriname Sweden Switzerland Tanzania Thailand Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Venezuela Yemen Zambia Zimbabwe 386 Country code AL AR AM AU AS AT AZ BA BH BN BB BE BL BO BT BR BU CA CH CI CO CR CT CY CZ DE DO Country name Albania Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Bolivia Botswana Brazil Bulgaria Canada Chile China P.R Colombia Costa Rica Croatia Cyprus Czech R Denmark Dominican R (1) Objective (2) Autonomy (3) Decision making (4) Appointment procedure (5) Committee size Appendix B Data Availability and Samples: Institutional and Qualitative Variables (6) Num target (7) Stability & supervision (8) Sdds standard (9) Index of economic freedom (10) Corruption perception index (11) Er regime 387 Ecuador Egypt El Salvador Estonia Ecb Fiji Finland France Georgia Germany Ghana Greece Guatemala Honduras Hong Kong Hungary Iceland India Indonesia Iran Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Korea Kuwait Kyrgystan Latvia Lesotho Lithuania EU EG ES ET EC FI FN FR GE GR GH GC GU HO HK HU IC IN ID IR IE IS IT JA JP JO KA KE KO KU KY LA LS LI (continued) 388 LU MA MW ML MT MU ME MO MN MZ NM NE NT NA Luxembourg Macedonia Malawi Malaysia Malta Mauritius Mexico Moldova Mongolia Mozambique Namibia Nepal Netherlands Netherlands Antilles New Zealand Nicaragua Nigeria Norway Oman Pakistan Papua New Guinea Paraguay Peru Philippines Poland Portugal PR PE PH PO PT NZ NI NG NO OM PA PP Country code Country name Appendix B Continued (1) Objective (2) Autonomy (3) Decision making (4) Appointment procedure (5) Committee size (6) Num target (7) Stability & supervision (8) Sdds standard (9) Index of economic freedom (10) Corruption perception index (11) Er regime 389 TU TR UG UR UK US UU VE YE ZA ZI QA RO RU SA SE SL SI SO SV SF SP SR SU SW ST TA TH TO TT obj aut dm ap comsize numt Note: Columns (1) through (7) are based on data collected in 2004–2005-2006; SDDS as of end of 2005 Columns (1) to (3) define “clarity,” (4) to (7) define variables that influence “conflict.” Qatar Romania Russia Saudi Arabia Senegal Sierra Leone Singapore Slovak R Slovenia South Africa Spain Sri Lanka Suriname Sweden Switzerland Tanzania Thailand Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Venezuela Yemen Zambia Zimbabwe Variable code sdds free corr err signifies that the data are available for the country in question sands 390 Pierre L Siklos Appendix C Coding of Select Governance and Socioeconomic Variables Code and expected sign obj = Objective − aut = Autonomy − dm = Decision making − ap = Appointments procedure − Explanation The principal mandate or objective of the central bank: CASE 1–SINGLE target consisting of: inflation exclusively (explicitly mentioned with/without a numerical target) or a monetary target of some kind, or an exchange rate target of some kind = CASE 2–MULTIPLE OBJECTIVES consisting of: inflation and some other economic variable = 5; other goals, namely monetary, financial stability as well as other objectives (e.g., economic growth/stability) = 1; other goals, namely exchange rate, financial stability, as well as other objectives (e.g., economic growth/stability) Source: Individual central banks through BIS’s central bank hub, http://www.bis.org/cbanks.htm Is the central bank independent/autonomous in making day-to-day monetary policy decisions? YES but this is NOT constitutionally mandated (i.e., not “organic” or part of the country’s constitution) = 75; if the answer is YES to the organic part of the previous case = 1; if the answer is that the central bank is not explicitly autonomous = 0; the central bank is NOT autonomous but its role/functions are defined in the country’s Constitution = 50 Source: Individual central banks through BIS’s central bank hub, http://www.bis.org/cbanks.htm Single decision maker (e.g., governor/president) = 0; Group or committee decision making = (if committee size is or less); = (if committee size is or more) NOTE: decision making refers to MONETARY POLICY decisions and NOT decisions by an executive or senior board (that may make appointments or other decisions) NOTE: Please record committee size, and whether finance minister (or a representative) is on the committee, or whether there are outsiders (i.e., individuals who NOT work for the central banks such as industry officials or academics) Source: Individual central banks through BIS’s central bank hub, http://www.bis.org/cbanks.htm Who appoints the CEO (i.e., governor/president) of the central bank: president/head of state of the country = 5; minister of finance, head of government (e.g., PM) = 1; Other (i.e., a committee of some sort defined in the central bank legislation) = Source: Individual central banks through BIS’s central bank hub, http://www.bis.org/cbanks.htm (continued) Institutional Rules and the Conduct of Monetary Policy 391 Appendix C Continued Code and expected sign numt = Numerical Target − sands = Financial System Responsibility SDDS CORR + FREE − ERR + Explanation Is there a numerical target the central bank aims for, whether in the central bank law or as part of a publicly announced quantitative objective? If YES, and its inflation = 1; if YES and it’s a monetary target = 25; if YES and it is an exchange rate type objective = 50 If NO or there is NO target = Source: Individual central banks through BIS’s central bank hub, http://www.bis.org/cbanks.htm Is the central bank responsible for maintaining “financial system stability,” “financial soundness,” “banking system soundness,” or “stability” and/or supervision of the financial/banking system? STABILITY only? YES = 5/NO = 25 SUPERVISION only? YES = 25/NO = 75 STABILITY and SUPERVISION = Source: Individual central banks through BIS’s central bank hub, http://www.bis.org/cbanks.htm Does the country in question adhere to the IMF’s special data dissemination standards? YES = 1; NO = http://dbbs.imf.org/Applications/web/sddshome Corruption Perceptions Index as measured by Transparency International http://www.transparency.org/ policy_research/surveys_indices/cpi Freedom house ranking: = free, = partly free, = not free http://www.freedomhouse.org De facto exchange rate regime classification scheme of Levy-Yeyati-Sturzenegger (2005): = Inconclusive; = Float, = Dirty, = Crawling peg, = Fix http://www.utdt.edu/∼ely/papers.html Index Blinder, Alan, 12, 77, 183, 185, 186, 188, 189, 263, 272, 280, 284, 320–322, 324, 329, 332, 333, 336 Bohl, Martin T., Bretton Woods, 55, 56, 127 Bridge bank, 138, 164–166, 172 Buiter, Willem, 129, 180, 188, 189, 219, 279 Bundesbank, 5, 123, 133, 185–187, 200, 204, 220, 251 accountability, 4, 10–12, 53, 56, 71, 188, 189, 192, 208, 218, 219, 221–239, 241–243, 250–253, 261, 262, 279, 283, 309, 351, 359, 361, 362, 365, 366, 372, 374 index, 239 ratings, 228, 229, 242 Alesina, Alberto, 75, 185, 197, 198, 357, 364, 370 Allen, William, 134, 135, 148, 149 announcements, 6, 85, 86, 89, 269, 273, 303, 313 noisy, 273 asymmetric information, 55, 262, 293, 306, 312, 319 Calomiris, 156 capital mobility, 55, 90, 193, 205 causality, 9, 179, 181, 197–199, 286, 292 central bank communication, 291, 338 central bank independence, 2, 4, 9, 10, 14, 53, 56, 57, 72, 76, 179–181, 190, 192, 208, 209, 221, 222, 228, 234, 265, 337, 357, 358, 363, 372, 376, 378 de facto, 198, 207, 210, 229 de jure, 184, 229, 357 central banks independence de facto, 357 Chortareas, Georgios, 4, 52, 54, 66–69, 73, 75, 193, 264, 273, 287, 306, 314 Clarida, Richard, 2, 24 commitment, 2, 4, 21, 24, 25, 28–36, 41, 42, 45–48, 53, 58, 60, 62–64, 69, 75, 191, 206, 223, 272, 274, 275, 282, 310 coordination, 8, 12, 261, 262, 264, 277, 278, 283, 305, 307, 311 Ball, Lawrence, 25 Bank for International Settlements, 122, 129 Bank of Canada, 3, 14, 22, 208, 292, 351 Act, 208 Bank of Chile, 351 Bank of England, 5, 14, 22, 55, 71, 78, 85, 93, 122, 124, 150, 155, 174, 175, 183, 220, 289, 320, 333, 336, 345, 372 Bank of Israel, 351 Bank of Japan, 93, 292, 345 Banque de France, 122 Basel Committee, 7, 129, 159, 162, 171 Berger, Helge, 4, 180, 187, 196, 200, 327, 338, 363 Bernanke, Ben, 1, 77 393 394 corruption, 15, 128, 363, 364, 370 credibility, 3, 9, 12, 13, 26, 34, 39, 40, 47, 52, 53, 62, 69, 77, 130, 185, 190–194, 197, 204, 222, 223, 225, 264, 268–270, 272, 273, 276, 279, 283, 288–291, 304–306, 311, 313, 360, 364, 375 crisis, 1, 3, 5, 6, 10, 11, 78, 123, 124, 127–129, 132, 133, 135, 141, 142, 149, 150, 152, 153, 155, 156, 165, 167, 171, 174, 175, 240, 241, 243, 245, 247, 249–251, 253 1997–98, 2007–08, 5, 6, 78, 132, 133, 253 Asian, 156, 174 financial, 1, 3, 5, 7, 8, 11, 78, 127, 132, 133, 148, 155, 245, 279, 378 Cukierman, Alex, 9, 11, 15, 69, 70, 72, 74, 180, 184, 191, 192, 196–198, 222, 261, 263, 265, 270, 272, 273, 279, 283, 301, 303, 304, 358, 378 currency board, 6, 88, 90, 150, 154, 155, 175, 180, 193 currency union, 122, 154 Czech Republic, central bank of the, 351 de facto, 129 de Haan, Jakob, 180, 186, 188, 192, 198, 200, 203, 232, 253, 264 default, 7, 121, 125, 133–140, 175, 329 deflation, 25, 27, 35, 48, 202 delegation, 4, 32, 52–55, 61–64, 68, 71, 72, 75–78, 191, 204, 205, 207, 221, 223 democratic institutions, 15, 363, 364 Deutsche Mark, 200 discount rate, 4, 28, 88, 89, 105, 107 discretion, 28, 29, 32, 41, 60, 63, 75, 190, 194, 275, 282, 310, 322, 360 discretionary policy, 4, 29, 32, 42 disinflation, 63, 185, 202, 273, 282, 287, 306, 309, 314 dynamic stochastic general equilibrium (DSGE), 53 Ehrmann, Michael, 285, 287, 289, 316, 318, 319, 337 Index Eijffinger, Sylvester, 11–13, 180, 187–189, 206, 219, 261, 264, 271, 274, 286, 289, 292, 293, 303–305, 311, 317, 319, 320, 335, 359 employment, 57–59, 64–68, 181–183, 187, 188, 195, 196, 270, 273, 275, 287, 306 euro, 148, 173 euro area, 2, 9, 21, 23, 26, 28, 92, 95, 97, 108, 111, 152, 154, 162, 169, 330, 331 eurobarometer, 200, 201, 206 European Central Bank (ECB), 5, 22, 74, 85, 91, 97, 101, 103, 113, 115, 133, 154, 168, 169, 180, 183, 188, 192, 223, 280, 289, 292, 293, 329, 330, 336, 337, 345 Governing Council, 89, 281, 331, 345, 351 European Monetary Union (EMU), 91, 185, 203, 206 Eurosystem, 87, 100, 106, 110, 147, 154, 170, 173 exchange rate, 6, 9, 15, 83, 90, 92, 121, 147, 152–154, 169, 170, 175, 180, 186, 192, 193, 207, 209, 269, 287, 301, 314, 358, 363, 365, 367, 372, 375, 390, 391 floating, 147, 152, 358 pegged, 15, 83, 127, 148, 153, 375 regime, 6, 9, 15, 90, 92, 186, 193, 363, 365, 373, 375, 391 Federal Deposit Insurance Corporation (FDIC), 159, 164 Federal Open Market Committee (FOMC), 285, 288, 331 Federal Reserve, 5, 39, 40, 55, 72, 74, 85, 91, 103, 105, 113, 115, 124, 133, 134, 147, 151, 159, 160, 162, 192, 207, 289, 292, 330, 336, 337 financial repression, 219 Financial Services Authority (FSA), 131, 133, 220, 240 financial stability, 2, 7, 8, 78, 121, 122, 133, 134, 140, 146, 148, 149, 152, Index 153, 157–159, 161, 170, 174–176, 253, 283, 390 fiscal policy, 56, 186, 378 forecasting, 13, 122, 272, 273, 282, 286, 314, 316, 333 forecasts, 13, 15, 70, 188, 265, 272–274, 278, 282, 285–287, 290, 291, 302, 306, 308, 311, 312, 316–318, 325, 359, 368, 381 inflation, 271, 286, 287, 317 forward-looking, 29, 32, 34, 35, 40, 46, 122, 265, 276 Fratzscher, Marcel, 285, 287, 289, 316, 318, 319, 337 Friedman, Milton, 269, 361 Gale, Douglas, 134, 135 Gali, Jordi, 2, 28 Gaspar, Vitor, 2, 3, 21, 30 Geraats, Petra, 11, 12, 189, 190, 219, 262, 264, 265, 269, 272–275, 286, 288, 289, 292, 308, 311, 312, 316, 319 Gertler, Mark, 2, 28 Glass–Steagall Act, 124 goal independence, 179, 183, 209 Gold Standard, 26, 47, 49, 55, 153, 175 Goodfriend, Marvin, 27, 207, 324 Goodhart, Charles, 6–8, 121, 122, 132, 134–137, 140, 148, 159, 166, 208, 219, 220, 325 governance, 1, 2, 10, 11, 14, 122, 218–224, 227–229, 238–243, 250–253, 338, 339, 357, 359–364, 367, 370–372, 376, 378, 379 public sector, 10, 218, 228, 239, 242, 243, 250, 252 Supervision, 10, 11, 218–221, 224, 228, 238, 241, 243, 252 Great Depression, 27, 55, 125, 126 Great Inflation, 26 Great Moderation, 1, 56, 185 Greenspan, Alan, 147, 174, 287 haircut, 139 Hayo, Bernd, 8, 9, 11, 15, 72, 74, 179, 180, 187, 188, 199–201, 207, 208, 210, 224, 358 395 Hefeker, Carsten, 8, 9, 11, 15, 72, 74, 179, 180, 224, 357, 358 Ho, Corinne, 5, 6, 83 Hong Kong, 6, 88, 90, 95, 98, 100, 106, 110, 112 Hume, David, 153 independence, 9, 10, 230, 234–236, 239, 250, 251, 317, 325, 332, 337, 338, 351 supervisor, 11, 225, 226, 229, 231, 234, 236, 237, 241, 250, 252 Index, 14, 39, 48, 206, 231, 236, 243, 264, 313, 316, 357, 358, 370, 372, 386 CBI, 197 Inflation, 2–5, 9, 10, 12–15, 21–33, 35–41, 45–48, 52–54, 56–68, 70–74, 76, 88, 130, 141, 147, 179–188, 191, 192, 194–205, 207–210, 222, 223, 265–276, 279–283, 285–288, 291, 302–307, 309–318, 333, 344, 351, 357, 358, 360, 361, 363, 364, 366–375, 378, 390, 391 bias, 32, 52, 57, 59, 60, 62, 64, 67, 68, 70, 71, 75, 76, 182, 190, 193–195, 222, 268–271, 273–276, 282, 301–304, 308 expectations, 2, 12, 24, 25, 28, 30, 40, 42, 44, 46, 47, 70, 130, 262, 264, 268–271, 273, 274, 276, 281, 282, 286–289, 291, 302–304, 308, 313, 315–317, 321 optimal, 67, 71, 271 persistence, 27, 28, 286, 287, 291, 313, 315, 317, 319 target, 3, 5, 6, 22, 28, 35, 40, 53, 54, 63, 66, 67, 70, 71, 76, 77, 83, 131, 180, 183, 185, 194, 197, 209, 271, 272, 274, 279, 282, 288, 304, 311–313, 317, 338, 345, 366, 372, 378 targeting, 1, 2, 4, 5, 9, 22, 32, 46, 53–55, 63, 67, 68, 70, 71, 75–78, 87, 88, 90, 91, 186, 193, 194, 219, 224, 270, 271, 317, 319, 338, 358 variance, 268, 270, 302, 305 information cascade, 334, 337, 340, 342, 343, 345, 351, 352 396 institutions, 8, 10, 11, 78, 89, 99, 107, 108, 124, 125, 127, 128, 130, 132, 134, 151, 156, 161, 167, 168, 170, 171, 174, 176, 191, 193, 197, 199, 202, 203, 207, 208, 218–221, 226, 235, 252, 316, 361, 375 political, 210, 327 instrument, 5, 6, 9–11, 48, 53, 56, 57, 76, 84, 86, 104, 109, 111, 112, 114, 122, 132, 179–181, 183, 186–188, 190, 192–194, 199, 201, 202, 209–211, 224, 265, 273, 308, 322, 337, 339, 371, 376 instrument independence, 57, 183, 200 interbank market, 7, 89, 94, 99, 109, 136, 138, 140, 151 interest rate, 4–7, 13, 25, 34–37, 40, 46, 48, 57, 84, 85, 89–94, 97–99, 104, 105, 108, 113, 114, 122, 126, 128, 130, 134–137, 153, 156, 160, 192, 202, 262, 274, 281, 282, 285, 286, 288–290, 301, 302, 308, 312–319, 333, 334, 336, 341–343, 345, 351, 353 nominal, 2, 3, 21, 34–36, 47, 129, 203, 265, 273, 288, 316 real, 34, 35, 45, 47, 73, 202, 265, 273 International Monetary Fund (IMF), 15, 358, 366, 368 Issing, Otmar, 262, 272, 280 Keynes, John Maynard, 47 Kydland, Finn, 52, 63, 75, 175, 181, 222, 266, 312 learning, 3, 12, 26, 34, 39, 41–48, 261, 262, 264, 281–284, 309 lender of last resort (LOLR), 8, 123, 150–152, 155, 156, 170, 176 liquidity, 35, 84, 89, 94, 100–102, 104, 105, 107–109, 111–114, 122, 123, 125, 128, 129, 134, 135, 141, 149, 151, 152, 155, 156, 159, 162, 174, 176, 202, 207, 279 Lohmann, Susanne, 75, 186, 190, 191, 304 Index London interbank offer rate (LIBOR), 162 loss function, 21, 26, 28, 29, 32, 36, 37, 48, 57–59, 64–67, 76, 183, 191, 303, 304 Lucas, Robert, 24, 265, 273, 305, 310, 312 Maastricht Treaty, 168 Maier, Philipp, 13, 14, 204, 264, 281, 320 mandate, 35, 104, 147, 161, 167, 171, 183, 218, 219, 221, 226, 228, 252, 253, 372, 390 Masciandaro, Donato, 10, 122, 133, 167, 169, 218, 239, 240, 243 Mayes, David, 8, 9, 122, 146, 158, 164, 171, 172 McCallum, Bennett, 75, 190, 195, 204 Meltzer, Alan, 11, 70, 261, 263, 283, 301 Miller, Stephen, 4, 52, 54, 66–69, 73, 75, 193, 273 Modigliani-Miller, 140 Monetary policy, 1–6, 9, 10, 12–14, 21–25, 27–30, 32, 36, 40, 41, 45, 47, 52–57, 60, 62, 64, 66, 68, 69, 71–78, 83–86, 88, 89, 92, 100–102, 104, 107, 114, 121, 131, 133, 134, 140, 147, 148, 153, 155, 170, 174, 179–182, 184–188, 190–197, 199, 200, 202–205, 207, 209, 210, 218–223, 225–227, 230–232, 234–236, 251, 252, 262, 265, 273, 279–282, 284–286, 289–291, 312, 315–323, 325, 329, 330, 332–334, 339, 344, 352, 353, 358–360, 362–367, 372, 376, 378, 390 Monetary Policy Committee, 13, 14, 131, 264, 280, 320–322, 330, 333, 337–340, 352, 372 inertia, 29, 329 minutes, 265, 287, 345 optimal size, 320 shirking, 327 voting records, 13, 265, 280, 287, 321, 333, 345 Monetary policy framework, 72, 77, 90, 91, 224 Index Monetary policy rules, 2, 45 monetary stability, 8, 9, 146, 148, 153, 179, 180, 338 monetary surprises, 181 monetary union, 75, 154, 193, 197, 280, 307, 364, 371 Morris, Stephen, 12, 13, 264, 277, 278, 283, 305, 308, 310, 312, 363, 367 National Bank of Hungary, National Bank of Poland, 351 New Keynesian, 2, 3, 25–29, 32, 35, 36, 39, 41, 45, 47, 265, 270 objective function, 4, 46, 53, 66, 68, 76, 190, 266, 268, 269, 276, 301–303, 305, 306, 310, 311 Orphanides, Athanasios, 3, 42, 46, 281, 282, 308 output gap, 2, 28–30, 33–37, 39, 45, 47, 48, 195, 266, 270, 272, 274, 275, 304, 305, 311 overnight rate, 90–92, 94–96, 98, 108 Phillips curve, 2, 25, 28, 29, 36, 39, 45–47, 52, 58, 265, 305, 309, 310 policy rate, 3, 85–92, 94, 96, 101, 105, 107, 108, 114, 282, 288, 289 policy rules, 4, 39, 40, 63 political business cycle, 186, 187 Polity IV project, 234 preferences, 4, 27, 69–72, 75, 114, 137, 182, 183, 187, 189–191, 193, 199, 200, 202, 205, 222, 232, 238, 252, 263, 267, 270, 273, 274, 276, 280, 281, 284, 301–305, 307, 311, 323–326, 329, 331 Prescott, Ed, 52, 63, 75, 181, 222, 266, 312 price level targeting, 2, 3, 24, 26, 32–36, 45–47 price stability, 1, 9, 10, 22, 24, 25, 27, 34, 46, 70, 121, 128, 130, 131, 133, 134, 147, 179–181, 183, 188, 197, 199–201, 203, 209, 218, 223, 253, 272, 338 principal–agent, 4, 52–57, 63, 75, 77 397 prompt corrective action (PCA), 159, 160, 167, 171 Quintyn, Marc, 10, 122, 133, 169, 218, 219, 225, 227–229, 239 Rational expectations, 2, 12, 24, 28–30, 33, 34, 40–42, 45, 47, 61, 62, 137, 264, 281, 282, 284, 301, 302, 305, 310 reaction function, 30, 40, 61, 62, 74 real-time gross settlement (RTGS), 84, 108 regulation, 7, 11, 78, 128, 129, 132, 133, 142, 167, 225, 237 repo rate, 87, 89, 91, 92, 106, 315 reputation, 14, 63, 64, 69, 75, 77, 103, 124, 140, 185, 197, 264, 269, 274, 275, 280, 284, 288–290, 303, 311, 316, 364, 365 Reserve Bank of New Zealand (RBNZ), 163, 194, 288, 292, 293 Reserve requirements, 6, 84, 85, 98, 99, 101–104 reserves, 6, 85, 87, 92–94, 97–104, 108, 109, 113, 114, 122, 135, 150, 155, 301 Rogoff, Kenneth, 32, 53, 54, 66, 69, 70, 182, 183, 185, 187, 190, 193, 194, 222, 311, 362 rules, 10, 33, 40, 45, 55, 63, 74, 78, 128, 132, 159, 171, 172, 174, 175, 187, 191, 207, 208, 324, 342, 359–363, 365 sacrifice ratio, 273, 287, 306, 314 seigniorage, 103, 197, 208 settlement balances, 99 Shin, Hyun Song, 12, 13, 134, 264, 277, 278, 283, 305, 308, 312 shocks, 7, 11, 13, 22, 29, 32, 36, 37, 48, 56, 62, 70, 140, 182, 190, 193, 194, 270, 271, 273, 274, 276, 278, 279, 283, 288, 301, 303, 305, 309, 311, 344, 372 398 shocks, (continued) demand, 25, 46, 135, 278, 309, 311 supply, 62, 71, 74, 271–273, 279, 306, 308, 311 Sibert, Anne, 264, 270, 276, 280, 305, 307, 310, 321, 325, 327, 330, 332 Siklos, Pierre, 1, 9, 13–15, 183, 185, 186, 210, 219, 224, 232, 264, 285, 287, 288, 313, 315, 316, 319, 336, 338, 357, 358, 360, 362–364, 366, 367 Smets, Frank, 2, 3, 21, 25, 36, 37, 39, 48 stationary, 2, 21, 24, 26, 30, 33, 36, 42, 48 supervision, 2, 7, 10, 11, 78, 142, 158, 168, 169, 171, 174, 221, 233, 236, 250–252, 386, 391 banking, 5, 7, 10, 126, 127, 129, 131, 219, 220, 225, 228, 229, 253 financial, 124, 130, 132, 133, 219, 221, 224–227, 240, 253, 324, 367, 370, 372 insurance, 220 securities, 220 Svensson, Lars, 2, 24, 25, 32, 33, 40, 54, 66, 67, 69, 186, 195, 264, 275, 277, 281, 303, 304, 310 Sveriges Riksbank, 22 SWIFT, 174 systemic stability, 122, 127, 129, 132, 134, 141, 142 TARGET, 173 targets, 5, 6, 11, 25, 53, 55, 56, 64–68, 71, 75, 76, 83, 85, 87, 88, 91–94, 102, 114, 183, 189, 266, 269, 274, 275, 282, 301, 310, 312, 319 Taylor rule, 40 Taylor, Michael, 10, 122, 133, 169, 218, 225, 229 Thornton, Henry, 175 time inconsistency, 24, 32, 52, 54, 63, 68, 75, 195 Index transmission mechanism, 6, 28, 45, 121, 308, 312 channel, 94, 202, 207 transparency, 1, 2, 4, 11–13, 53, 56, 77, 188, 189, 224, 225, 228, 261–266, 268–290, 292, 293, 310–312, 317, 319, 335, 336, 345, 359, 374 Index, 12, 286, 291 operational, 265, 275, 293, 303, 312, 317, 319 policy, 64, 229, 265, 285, 293, 312, 319 political, 265, 269, 272, 274, 284–286, 290, 292, 293, 312, 319 procedural, 12, 265, 279–281, 283, 287, 290, 293, 312, 317, 319 Tsomocos, Dimitri, 6–8, 121, 135, 136, 148, 219 uncertainty, 3, 7, 22, 23, 26, 39, 40, 45–47, 69–73, 134–136, 170, 191, 202, 262, 268, 270, 271, 274, 281, 301–303, 305, 308, 312, 315, 316, 324, 335 van der Cruijsen, Carin, 11–13, 188–190, 261, 287–289, 317, 319, 320, 335, 359 Vestin, David, 2, 3, 21, 25, 32 wage rigidity, 37 Walsh, Carl, 54, 57, 59, 60, 66, 67, 69, 70, 72–74, 193, 271, 278, 303, 311 Wicksell, Knut, 47 Williams, John, 3, 39, 40, 42, 46, 274, 281, 282, 308, 312, 328 Wohar, Mark, 1, 52 Wood, Geoffrey, 8, 9, 122, 146, 148, 149, 174 Woodford, Mark, 2, 4, 24, 25, 27, 28, 30, 33, 35, 36, 41, 77, 134, 335 Wouters, Ralf, 21, 26, 36, 39, 48 zero lower bound, 25, 34, 35 ... of investigation include domestic and international macroeconomics, international finance, monetary theory, and financial institutions Challenges in Central Banking The Current Institutional Environment. .. markets and the public more generally Nevertheless, there remains considerable diversity in the institutional framework affecting central banks, the manner in which the stance of monetary policy. .. Implementing Monetary Policy in the 2000s: Operating Procedures in Asia and Beyond Corrinne Ho 4.1 4.2 4.3 4.4 4.5 4.6 Introduction The Institutional Aspects of Monetary Policy Decisions The Operational