New Advantages of Tying One’s Hands: Supervision, Monetary Policy and Central Bank Independence
27 Pages Posted: 17 Jul 2010
Date Written: July 14, 2010
We investigate the reasons that induce policymakers to assign banking supervision to central banks rather than involving authorities outside the banking sector. We find that 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 informational advantage on the status of the banking sector and the possibility of making an instrumental use of monetary policy as means to hide supervisory misconduct. We find that the presence of some specific goals in the central bank’ statute mitigates this trade-off. We explore which statutory goals are better suited to solve such conflict.
Keywords: Banking supervision, central bank independence, monetary policy
JEL Classification: G18, G28, E52, E58
Suggested Citation: Suggested Citation