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

27 Pages Posted: 17 Jul 2010

See all articles by Lucia Dalla Pellegrina

Lucia Dalla Pellegrina

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

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 14, 2010

Abstract

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

Dalla Pellegrina, Lucia and Masciandaro, Donato and Pansini, Rosaria Vega, New Advantages of Tying One’s Hands: Supervision, Monetary Policy and Central Bank Independence (July 14, 2010). 5th Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=1641102 or http://dx.doi.org/10.2139/ssrn.1641102

Lucia Dalla Pellegrina (Contact Author)

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

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
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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