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The boundaries of central bank independence: Lessons from unconventional times

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  • Orphanides, Athanasios

Abstract

What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets. Lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The experience of the Bank of Japan's encounter with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank adopted in 2013.

Suggested Citation

  • Orphanides, Athanasios, 2018. "The boundaries of central bank independence: Lessons from unconventional times," IMFS Working Paper Series 124, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    • Handle: RePEc:zbw:imfswp:124
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    Cited by:

    1. Boehl, Gregor, 2022. "Efficient solution and computation of models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    2. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    3. Masazumi Hattori & Steven Kong & Frank Packer & Toshitaka Sekine, 2021. "The Impact of Regime Change on the Influence of the Central Bank's Inflation Forecasts: Evidence from Japan's Shift to Inflation Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-34, October.
    4. Shigenori Shiratsuka, 2018. "Central Banking in a Changing World Summary of the 2018 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," IMES Discussion Paper Series 18-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Koichi Hamada & Makoto Sakurai, 2022. "A return to international policy coordination in the age of secular stagnation," International Journal of Economic Policy Studies, Springer, vol. 16(2), pages 371-388, August.

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    More about this item

    Keywords

    Bank of Japan; Federal Reserve; ECB; zero lower bound; quantitative easing; central bank independence; price stability; inflation target; balance sheet risk;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

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