Central Bank Independence and Macro-Prudential Regulation

April 1, 2012

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Format: Chicago

Fabian Valencia, and Kenichi Ueda. Central Bank Independence and Macro-Prudential Regulation, (USA: International Monetary Fund, 2012) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.

Subject: Banking, Credit, Financial sector stability, Inflation, Price stabilization

Keywords: Central bank, Monetary policy, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/101
Stock No:

WPIEA2012101
ISBN:

9781475502916
ISSN:

1018-5941

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