استقلال بانک مرکزی و ثبات مالی: آیا بین این هماهنگی کامل وجود دارد؟

In this paper we show that the degree of central bank independence influences the optimal choice of monetary policy strategy during potentially unsustainable asset price booms. We assume that central bankers have to choose between a policy that preemptively raises short-term real interest rates in the boom phase to prevent the build-up of a financial market crisis scenario and the cleaning-up strategy that ignores its impact on the likelihood of a future crisis. We find that the more independent central bankers are, the more likely it is that they refrain from implementing preemptive monetary tightening to maintain financial stability. These results stand in sharp contrast with the seemingly predominant view that central bank independence fosters financial stability. The intuition underlying these results is that a preemptive interest rate hike gives rise to, among other things, a lower inflation rate in the boom period. Whether this disinflation creates additional costs or benefits depends on the degree of central bank independence. It can benefit dependent central bankers who otherwise would suffer from a higher inflation bias; however, for independent central bankers, this disinflation leads to an undesirable undershooting of their inflation target.

The two decades prior to the most recent global financial crisis saw the emergence of a new consensus about monetary policy that highlighted, among other things, the importance of central bank independence (hereafter, CBI) and the affirmation of price stability as a mandated goal for monetary policy. This consensus view is not only well documented in mountains of academic literature but also corresponds to the remarkable changes in monetary policy practices that took place in many countries during that time. Since the late 1980s, many central banks have achieved more independent status, and the related revisions of the central bank laws generally have led to a greater emphasis on price stability. Economic theory suggests that CBI, coupled with an explicit mandate for maintaining price stability, offers an institutional device for realizing the social benefits associated with low and stable inflation rates. In addition, a large body of empirical studies provides evidence that these benefits of CBI come about without apparent costs, such as a deterioration of real macroeconomic performance (e.g., increased output volatility, reduced economic growth). Moreover, it has even been claimed that CBI does not only help assure price stability but also fosters financial stability (e.g., Bernanke, 2010a and Arnone et al., 2009). Former conventional wisdom (i.e. prior to the recent global financial crisis) stressed that at least in the long run, no trade-off between price stability and financial stability existed. At first glance then, it might seem reasonable to expect a double dividend: those institutional changes that have helped achieve low and stable inflation rates seem conducive to a stable financial system as well. In sharp contrast to the voluminous literature on the relationships between CBI and inflation, a still scarce, albeit burgeoning, research stream attends to the impact of CBI on financial stability.1Čihák (2010) argues that insulating monetary policy from political pressures implies that central bankers are less constrained from acting preemptively to prevent financial crises. He also presents some preliminary empirical findings that support the view that CBI fosters financial stability. Using a sample of yearly data for 79 countries between 1970 and 1999, García Herrero and Del Río (2003) provide evidence that higher values of CBI indicators are associated with a lower likelihood of a banking crisis. Relying on a broader set of financial instability indicators and a sample of 80 countries between 1985 and 2005 Klomp and de Haan (2009) also find a negative relation between CBI and financial instability. However, such tentative findings regarding the link between CBI and financial stability should surprise those observers who recognize that both the recent global financial crisis and the Wall Street crash at the end of the 1920s, which led to the Great Depression, occurred during periods in which CBI had been comparatively high for an extended time. Thus in an analysis of historical experiences, Bordo (2010) cannot arrive at a clear-cut conclusion. However, he emphasizes that the U.S. Federal Reserve Bank's policy during the interwar period indicates that CBI can be harmful for financial stability if monetary policy is based on a flawed policy doctrine. Furthermore, insofar as CBI contributes to a high degree of monetary policy credibility and thus the existence of a low inflation environment, it may create the so-called paradox of credibility. According to Borio and Lowe (2002), a credible low inflation policy reduces the probability that investors and financial institutions assign to the occurrence of a future economic downturn and encourage them to engage in further borrowing and lending, respectively, thus driving up asset prices and private indebtedness. A credible monetary policy could therefore render the financial system, paradoxically, more vulnerable to adverse economic shocks.2 In this paper we analyze the nexus between CBI and financial stability and ask how the policy chosen in the run-up to an asset price bust depends on the degree of central bank independence. To do that we modify an otherwise standard New Keynesian model by integrating the degree of CBI – in dependence on political pressure – and the possibility of a financial crisis. To the best of our knowledge, this work belongs to the first attempts to model the impact of CBI on financial stability. We show that policymakers' optimal choice between a policy that preemptively raises short-term real interest rates in the boom phase to prevent the build-up of a financial market crisis scenario and the cleaning-up strategy that ignores its impact on the likelihood of a future crisis inter alia depends on the degree of CBI. In particular, our model results stand in sharp contrast to the view that CBI fosters financial stability. The intuition underlying this result is that safeguarding financial stability through a preemptive interest rate hike not only leads to output gap losses but also gives rise to lower inflation rates in the boom period. This can be beneficial for politically dependent central bankers, who must follow less hawkish anti-inflation policies than actually warranted by their own policy objectives. For independent central bankers the decrease in inflation only gives rise to additional costs because inflation gets driven away from its target. Therefore, the more independent central bankers are, the lesser their willingness is to prevent the occurrence of a future financial crisis. We further show that if the cleaning-up strategy is chosen, it does not imply that central bankers should stay passive and view a potential detrimental asset price boom with benign neglect, as was apparently favored until the recent crisis by politicians and academics alike (e.g., Greenspan, 2002 and Posen, 2006). As also suggested by Berger and Kißmer (2008) and Gruen et al. (2005) in a different set-up the optimal cleaning-up approach involves a preemptive loosening of monetary policy when central bankers confront a looming asset price bust in an attempt to accommodate the progressive deterioration of expectations before the crisis or overcome time lags in monetary policy transmission, respectively. Hence, our model suggests another important policy conclusion: Central bankers' willingness to adopt a leaning-with-the-wind strategy during asset price booms is higher when the degree of CBI is greater. Our approach relates to the literature that deals with the hotly debated question of the extent to which, and how, monetary policymakers should adjust interest rates when they observe rapidly rising asset prices. Prior to the recent financial crisis, the conventional wisdom regarded interest rate policy as an overly blunt tool to deal effectively with asset price boom-and-bust cycles. The best monetary policy could do instead was to mitigate the adverse effects on inflation and the output gap after the bubbles burst (“clean-up”).3 Recently, sparked at least partially by the global financial crisis and its severe economic repercussions, this consensus has started to falter (White, 2009). Studies such as Berger et al. (2007), Bordo and Jeanne (2002), Gruen et al. (2005) and Woodford (2012) stress that under certain circumstances monetary policymakers should be ready to act preemptively to prevent future financial crises.4 Similar to our paper these studies show that the optimal policy response to an asset price boom depends in a complex way on various economic determinants, such as the probability of a bust-induced credit crunch and the degree of “market exuberance” (Bordo and Jeanne, 2002), the extent of private sector's forward-looking behavior (Berger et al., 2007), the time lags of monetary policy (Gruen et al., 2005) or the availability of other macro-prudential policy tools (Woodford, 2012). None of these studies, however, considers the nexus between CBI and financial stability and its interplay with the optimal monetary policy response in times of financial crises.5 The remainder of this paper is organized as follows. A stylized New Keynesian model that allows for financial shocks and integrates CBI will be presented in Section 2. We analyze the links among monetary policy, financial stability, and CBI in Section 3. Section 4 details the optimal monetary policy choice if and when an asset price boom may turn to bust, as well as its dependence on the degree of CBI. Section 5 concludes.

The recent financial crisis seems not only to have given rise to doubts about the optimal monetary strategy but also sparked a debate about the interplay between CBI and financial stability. We contribute to the still relatively small but burgeoning strand of literature that deals with the question of whether CBI fosters financial stability. To do that we modify a simple New Keynesian model to allow for different degrees of CBI and political pressure on monetary policymakers. Within this framework, we analyze the effects of CBI on monetary policymakers' willingness to avoid a financial crisis and maintain financial stability. We assume that policymakers can choose between the leaning-against-the-wind policy that preemptively raises short-term real interest rates in the boom phase to prevent the build-up of a financial market crisis scenario and the cleaning-up strategy that ignores its impact on the likelihood of a future crisis. The view that CBI not only contributes to price stability but also fosters financial stability is not supported by our analysis. On the contrary, we find that the more independent central bankers are, the more likely they are to choose the cleaning-up approach and thus refrain from eliminating the risk of potentially severe financial instability in the future. The disinflation associated with a preemptive interest rate hike in the boom period can be beneficial for dependent central bankers who are subject to political pressure and therefore suffer from an overly high inflation rate. Relatively independent central banks, however, suffer from deflation (or, more generally, from an undershooting of the inflation target) if they adopt the leaning-against-the-wind policy to maintain financial stability. Given a relatively high degree of CBI, a preemptive monetary tightening can drive inflation too far away from its target level. Our model thus predicts that inter alia, relatively independent central bankers are more likely to adopt the cleaning-up strategy than their more dependent counterparts. We also show that the cleaning-up approach should not to be equated with a “benign neglect” view on soaring asset prices, i.e. staying inactive during the boom. If policymakers decide to adopt the cleaning-up approach, they need to be ready to lean with the wind, i.e. initiate a preemptive monetary loosening already during the boom phase, when agents' expectations start to deteriorate. Several interesting and promising avenues for future research on the basis of our findings can be envisaged such as extending, or rather reversing, this paper's research question and investigating in addition how financial instability affects the optimal degree of CBI. More sophisticated means of government interventions or escape clauses, respectively, could be considered. For example, Cukierman (2011b) discusses the impact of financial instability on the optimal degree of CBI. He proposes that central bankers should decide alone about monetary policy in normal times. However, when in extreme circumstances such as financial crises central bankers are forced to implement substantial quasi-fiscal operations, monetary policy should be determined jointly by the central bankers and political authorities. The precise circumstances that trigger government interventions should be formulated in advance. We expect that the proposed escape clauses could affect central bankers' optimal policy already in the run-up to potential financial crises. If one assumes that otherwise independent central bankers are not indifferent about the degree of CBI, the threat of government interference, should a severe financial crisis occur, may increase central bankers' willingness to lean against the wind during boom periods.