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Karen Bespalov
Karen Bespalov

Central Banking: Theory And Practice In Sustain... Free


The issue of central bank independence has been the subject of important academic work. However, the literature has mainly focussed on the theoretical and formal aspects, without considering that the distance between theory and practice is not always so short. [1] The experience of the past few years has shown that the implementation of the rule of law is not without challenges, even inside the European Union.




Central Banking: Theory and Practice in Sustain...



Article 7 of the Statute of the ESCB echoes this statement. The Treaty provisions on central bank independence apply to all EU Member States (except the United Kingdom, which has a special derogation [5]), irrespective of euro area membership. Countries are thus expected to have completed the process of granting their central bank full institutional independence by the time of accession to the EU; in practice, however, this is not the case.


The extent and nature of central bank independence can be assessed on the basis of its legal provisions. However, central bank independence also hinges on a broad series of factors and customary practices, which are partly determined by historical developments in the different countries. In particular, the way in which certain conflicts with other bodies of government have been resolved influences the extent to which a central bank is effectively protected against external interferences and marks the boundaries of independence. [6]


Central Banking takes a comprehensive look at the topic of central banking, and provides readers with an understanding and insights into the roles and functions of modern central banks in advanced as well as emerging economies, theories behind their thinking, and actual operations practices. The book takes a systematic approach to the topic, while providing an accessible format and style that is appropriate for general audiences and students with only a minimal macroeconomic background. Theoretical reviews and examples of how the theories are applied in practice are presented in an easy-to-understand manner and serve as a guide for readers to further investigate specific ancillary central banking topics and as a means to make informed judgments about central bank actions. Important topics covered in the book include:


Published quarterly, the journal features articles on central bank theory and practice, with a special emphasis on research relating to monetary and financial stability. The main objectives of the International Journal of Central Banking are:


In undertaking financial reforms, it is important that we maintain and protect the aspects of central banking that proved to be strengths during the crisis and that will remain essential to the future stability and prosperity of the global economy. Chief among these aspects has been the ability of central banks to make monetary policy decisions based on what is good for the economy in the longer run, independent of short-term political considerations. Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.


To be clear, I am by no means advocating unconditional independence for central banks. First, for its policy independence to be democratically legitimate, the central bank must be accountable to the public for its actions. As I have already mentioned, the goals of policy should be set by the government, not by the central bank itself; and the central bank must regularly demonstrate that it is appropriately pursuing its mandated goals. Demonstrating its fidelity to its mandate in turn requires that the central bank be transparent about its economic outlook and policy strategy, as I will discuss further in a moment. Second, the independence afforded central banks for the making of monetary policy should not be presumed to extend without qualification to its nonmonetary functions. For example, many central banks, including the Federal Reserve, have significant responsibilities for oversight of the banking system. To be effective, bank regulators and supervisors also require an appropriate degree of independence; in particular, the public must be confident that regulators' decisions about the soundness of specific institutions are not unduly influenced by political pressures or lobbying. But for a number of reasons, the nature and scope of the independence granted regulatory agencies is likely to be somewhat different than that afforded monetary policy. In the conduct of its regulatory and supervisory activities, the central bank should enjoy a degree of independence that is no greater and no less than that of other agencies engaged in the same activities; there should be no "spillover" from monetary policy independence to independence in other spheres of activity. In practice, the Federal Reserve engages cooperatively with other agencies of the U.S. government on a wide range of financial and supervisory issues without compromising the independence of monetary policy.


The Historical Evolution of Central Bank IndependenceSupport for the idea of central bank independence has evolved over time. In the United States and many other countries, the historically high and volatile inflation rates in the 1970s and early 1980s prompted a reexamination of monetary policies and central bank practices. Since that time, we have observed the confluence of two global trends: the widespread adoption of improved monetary policy practices and the virtual elimination of high inflation rates. The improved policy practices prominently include a broad strengthening of central bank independence, increased transparency on the part of monetary policy committees, and the affirmation of price stability as a mandated goal for monetary policy. Inflation targeting, in which the government sets a numerical target for inflation but assigns responsibility for achieving that target to the central bank, has become a widely used framework embodying these principles, but other similar monetary frameworks have also proved effective.


10. The Employment Act of 1946 established the objectives of "maximum employment, production, and purchasing power" for all federal agencies, whereas the 1977 amendment to the Federal Reserve Act gave the Federal Reserve the specific mandate of promoting "maximum employment, stable prices, and moderate long-term interest rates." Price stability requires that the central bank not attempt to drive employment above its sustainable level, and so in practice the Federal Reserve has interpreted its mandate to include maximum sustainable employment. The goal of moderate long-term interest rates is frequently dropped from statements of the Federal Reserve's mandate not because the goal is unimportant, but because moderate long-term interest rates are generally the byproduct of price stability. Return to text


INSPIRE Sustainable Central Banking Toolbox Policy Briefing Paper Series: Co-hosted with the SOAS Centre for Sustainable Finance, and published by the Grantham Research Institute, this briefing paper series is designed to support central bankers and financial supervisors in calibrating monetary, prudential and other instruments in accordance with sustainability goals, as they address the ramifications of climate change and other environmental challenges. All papers in this series are being written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research, drawing from best practice in central banking and supervision. Papers from the Central Banking Toolkit Policy Briefing Series can be downloaded here.


The independence of central banks seems indisputable, even more so in these times of pandemic, in which they have increased their use of unconventional policies and provided coverage for the high funding needs of states. In this article we will explore the theory and empirical evidence supporting the importance for central banks to maintain their independence.


All papers in this series are written and peer-reviewed by leading experts from central banks, academia and think tanks, and are based on cutting-edge research, drawing from best practice in central banking and supervision.


Henry Thornton, a merchant banker and monetary theorist has been described as the father of the modern central bank. An opponent of the real bills doctrine, he was a defender of the bullionist position and a significant figure in monetary theory. Thornton's process of monetary expansion anticipated the theories of Knut Wicksell regarding the "cumulative process which restates the Quantity Theory in a theoretically coherent form". As a response to the 1797 currency crisis, Thornton wrote in 1802 An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, in which he argued that the increase in paper credit did not cause the crisis. The book also gives a detailed account of the British monetary system as well as a detailed examination of the ways in which the Bank of England should act to counteract fluctuations in the value of the pound.[56]


In light of increased capital mobility, newer central bank laws often delegate the authority over the exchange rate regime to the central bank in consultation with the government. Monetary and exchange rate policies are inextricably linked, particularly in countries with a convertible currency and free capital mobility. It can thus be argued that an autonomous central bank also must be in charge of deciding the exchange rate policy, if it is responsible for controlling inflation.15 However, this is based on the assumption that the exchange rate movements simply reflect changes in money demands and supplies, while in practice, particularly in the short run, numerous factors under the authority of the government affect the real exchange rate. Careful consideration must thus be given to country-specific conditions. 041b061a72


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