New Advantages of Tying One’s Hands: Financial Supervision, Monetary Policy and Central Bank Independence

30 Pages Posted: 31 Jan 2010  

Lucia Dallapellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS); Paolo Baffi Center - Bocconi University

Donato Masciandaro

Bocconi University - Department of Economics

Rosaria Vega Pansini

Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Bocconi University - Department of Economics

Date Written: January 31, 2010

Abstract

We investigate the reasons that induce policymakers to assign banking supervision to central banks rather than involving authorities outside the banking sector. On the one hand, empirical results provide evidence that policymakers prefer that, conditional on several known features affecting supervisory task assignment, the latter are better to be given to central banks. On the other hand, higher central bank operational freedom (economic independence) is associated with a reduced degree of supervisory powers. This outcome is explained by a trade-off between central bank’s higher capability of achieving better information on the status of the banking sector and the possibility of making an instrumental use of monetary policy as a means to hide supervisory misconduct. We find that a feature mitigating this trade-off is the presence of some specific goals in the central bank’ statute aimed at increasing its political independence. We explore which statutory goals are better suited to solve such conflict.

Keywords: Banking Supervision, Central Bank Independence, Monetary Policy

JEL Classification: E58, G18, G28

Suggested Citation

Dallapellegrina, Lucia and Masciandaro, Donato and Pansini, Rosaria Vega, New Advantages of Tying One’s Hands: Financial Supervision, Monetary Policy and Central Bank Independence (January 31, 2010). Finlawmetrics 2010 Conference Paper. Available at SSRN: https://ssrn.com/abstract=1545398 or http://dx.doi.org/10.2139/ssrn.1545398

Lucia Dallapellegrina (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Paolo Baffi Center - Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Donato Masciandaro

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Rosaria Vega Pansini

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy
+39-02-58365194 (Phone)

Bocconi University - Department of Economics ( email )

Via Roentgen 1
Milan, 20136
Italy
+39-02-58365194 (Phone)

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