Government, Central Bank and Banking Supervision Reforms: Does Independence Matter?

26 Pages Posted: 17 Jul 2010 Last revised: 20 Nov 2010

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Rosaria Vega Pansini

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

We empirically investigate whether central bank independence (CBI) and the monetary policy setting can jointly influence the likelihood that policymakers assign banking supervision to central banks. We find that, conditional on the government being a benevolent one, higher central bank operational freedom (economic independence) is associated with a reduced degree of supervisory powers. We motivate this with the possibility that governments fear the risk of a discretionary misuse of monetary tools. However, it turns that having tight monetary policy goals(a specific form of political independence) increases the odds of a central bank involvement in supervision. Our interpretation is that this may represent a commitment device mitigating the risk of central bank discretion in monetizing financial distress. Our study suggests that CBI can be relevant, not only for the alleged beneficial effects on macroeconomic variables, but also in influencing policymakers’ decisions in terms of banking supervision.

Keywords: Banking supervision, central bank independence, monetary policy

JEL Classification: G18, G28, E50, E52, E58

Suggested Citation

Masciandaro, Donato and Dalla Pellegrina, Lucia and Pansini, Rosaria Vega, Government, Central Bank and Banking Supervision Reforms: Does Independence Matter? (2010). Paolo Baffi Centre Research Paper No. 2010-74. Available at SSRN: https://ssrn.com/abstract=1641091 or http://dx.doi.org/10.2139/ssrn.1641091

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
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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