Frameworks for the Resolution of Government Central Bank Conflicts

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Frameworks for the Resolution of Government-
Central Bank Conflicts

• Pierre L. Siklos
• Department of Economics
• and Viessmann Research Centre
• Wilfrid Laurier University Waterloo ON CANADA

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Introduction
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The Power of Central Bankers
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A 20th Century Chronology
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Definitions and Concepts
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Existing Frameworks A Typography

• Non-recognition of conflict (What, me worry?)
  United States
• relies on historical antecedents
• narrowest of dismissal provisions
• CB objectives defined as narrowly as possible and
  may have no provision for dismissal
• Minimal recognition of conflict Japan/Austria
  (pre-ECB)/ECB
• Only the broadest of recognition of the
  possibility of fiscal-monetary conflict
• Only general provisions for dismissal for extreme
  conduct provided for
• The Directive framework Canada, Netherlands
  (pre-ECB),NZ,UK
• Has elements of minimal recognition framework
  as well as
• Outline of government action in the event of a
  conflict and may have a resolution process

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Types of Conflict

• Personalities Doubtful that any statutory
  framework can deal with this problem in a
  satisfactory manner
• Policies The more serious kind of conflict that
  can be addressed via good legislative design

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The Enduring Attraction of Statutes

• Some Evidence and Lingering Doubts

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Central Banks and Growth
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CB, Inflation and Interest Rates
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Types of Statutory Remedies

• Legal Explicit definitions of the relationship
  ?via central bank law
• Cannot account for all potential sources of
  conflict long-run only? What short-run aspects
  should be included? organic vs other forms
• Economic and Institutional Subtle aspects of the
  relationship ? via press releases, memoranda of
  understanding,
• Instruments of policy, inflation target, other
  short-run aspects of monetary policy making

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Costs and Benefits

• Trade-Off
• Explicitness vs. Subtlety. in Framework Design
• Costs of being too explicit
• May be too restrictive when flexibility is called
  for. Necessary changes require legislative
  changes which are costly and time consuming to
  implement
• May lead to tunnel vision or myopic mentality
• Benefits of explicit legislative provisions
• Clarity about the limits of independence
• Avoids temptation for Govt to manipulate central
  bank

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Conflicts Between Central Banks and Government
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What History Teaches US?Selected Govt-CB
Conflicts

• Old episodes
• The Fed and the Treasury in the 1950s
• The Bank of Canada and the Coyne Affair
• The EMS and German reunification

• Newer episodes
• The RBNZ and inflation targets
• The Bank of Japan and deflation
• The ECB, the President, and the Board
• Swedens Riksbank and seigniorage

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Do these conflicts suggest where the trade-off
lies?

• The Fed and the Treasury in the 1950s?/CONTINUED
  BUT UNSUCCESSFUL THREAT TO AUTONOMY SOME
  LEGISLATIVE CHANGES
• The Bank of Canada and the Coyne Affair
  ?DIRECTIVE/LEGISLATIVE
• The EMS and German reunification ?PASSIVE
  AGGRESSIVE/NON-LEGISLATIVE

• The RBNZ and inflation targets ?CHANGE IN IT
  DEFINITION/QUASI-LEGISLATIVE
• The Bank of Japan and deflation ?DISPUTE IN
  PROGRESS/THRAT OF LEGISLATIVE CHANGE IT
• The ECB, the President, and the Board ?DISPUTE IN
  PROGRESS/SIDE-STEPPING LEGISLATIVE CHANGES
• Swedens Riksbank and the Govt? IN PROGRESS/NEED
  FOR LEGISLASTIVE CLARITY

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Do these conflicts suggest where the trade-off
lies?

• HISTORICAL EXPERIENCE SUGGESTS A PROBLEM
• THE ENDOGENEITY OF CENTRAL BANK-GOVERNMENT
  INSTITUTIONAL RELATIONS
• ? How a conflict is resolved is a function not
  just of the legislation but how earlier conflicts
  were resolved and the evolution of the central
  bank as an institution

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General Principles to Minimize Conflict
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Principles of anOptimal Statutory Framework

• Optimality defined minimize Government Central
  Bank Conflicts subject to the constraint of
  explicitness
• Requires a mix of Legal/Economic/Institutional
  elements
• Optimal Sequencing may be necessary
• Possible sequencing Economic?Institutional?Legal

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Legal elements

• Key components in an ideal central bank law
• Clear definition of the principal objective(s) of
  policy, who sets them, and when
• A guarantee of instrument independence
• Clear division of responsibility for exchange
  rate policy and Forex intervention
• Clear division of labor over bank supervision
• Clear definition of conflict resolution
  procedures
• Clear outline of central bank budget
• Clear limits to Govt Fin. Sector borrowing from
  the central bank
• Clear outline of decision-making/Appt procedures
  at the CB
• Committee vs. Single-decision maker approach

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The Art of Inflation Targeting
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Economic/Institutional

• Accountability
• What price stability means
• Procedures and remedies in the event objective(s)
  of policy not met
• Outline of reporting procedures and frequency and
  type to legislative and administrative branches
  of Govt
• Outline of rules for modification and location
  of responsibility for economic objectives of
  the central bank

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Accountability
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Economic/Institutional

• Disclosure
• Minutes, votes of central bank decision-making
  body
• Publication of economic outlook and assumptions
• Publication of monetary policy strategy
• Public disclosure of research and analysis
  activities
• Public communication and economic commentary by
  senior central bank officials

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Communicating with the Public
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The Need for Flexibility
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Tensions Between Real and Nominal The Real View
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Tensions Between Real and Nominal The Nominal
View
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A Major Step Forward
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A Central Bank Legislative Manifesto
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Core Elements of an Ideal Central Bank Law

• The sole objective of the central bank should be
  price stability
• The central bank shall have instrument
  independence
• The details of an inflation target will be
  outlined in a separate agreement between the
  government and the central bank which shall be
  reviewed at regular intervals
• The central bank shall not have an exchange rate
  target and will only intervene in foreign
  exchange markets to maintain orderly markets. Any
  intervention shall be publicly explained
• The central banks mandate shall include the
  maintenance of financial stability. The central
  bank shall endeavor to maintain stability in
  cooperation with the independent supervisory
  authority as well as via public announcements of
  any actions the central bank deems necessary for
  the maintenance of the financial stability
  objective
• The central bank shall be solely responsible for
  the day to day implementation of monetary policy.
  Monetary policy decisions shall not be subject to
  any direction from the government unless it makes
  public the reasons it wishes to direct the
  central bank to alter its policies. From time to
  time, the government may, via periodic reviews of
  the conduct of monetary policy, set a new course
  for the central bank. This will require amending
  the central bank law subject to some majority
  voting rule
• The central bank and the government shall agree
  on a funding agreement to last until the current
  governments mandate ends. Changes in the funding
  mandate shall be publicly announced and explained
  by the government.

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Core Elements of an Ideal Central Bank Law

• All forms of government borrowing from the
  central bank shall be prohibited, even
  temporarily. Borrowing by the financial sector
  shall be limited to extraordinary circumstances.
  These extraordinary circumstances shall be
  jointly agreed to by the government, the central
  bank, and financial sector representatives, and
  be subject to periodic reviews
• Governance The central bank shall have a Board
  of Governors (BOG) and a monetary policy
  committee (MPC). The MPC is responsible for
  monetary policy decisions while the BOG is the
  oversight body for the central bank and the MPC
  and is charged with, among other
  responsibilities, approving nominations to the
  MPC. Members of the BOG shall be appointed by the
  government subject to legislative approval (for x
  years non-renewable). The MPC shall consist of x
  members, appointed for x years (renewable). Only
  the BOG can remove the Governor or members of the
  MPC for just cause (non-policy reasons)
• The central bank shall be subject to reporting
  requirements. These include and Annual Report,
  testimony to the appropriate legislative body,
  regular outside audits, a research function with
  standards and expectations to be met and publicly
  announced, and engage in providing general
  information to the public about the conduct of
  monetary policy in regular public fora