Central Bank Independence and Macro-Prudential Regulation

27 Pages Posted: 23 Apr 2012

See all articles by Kenichi Ueda

Kenichi Ueda

University of Tokyo - Faculty of Economics

Fabián Valencia

International Monetary Fund (IMF)

Date Written: April 23, 2012


We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.

Keywords: Monetary Policy, Macro-prudential Regulation, Central Bank Independence, Time inconsistency

JEL Classification: C61, E21, G13

Suggested Citation

Ueda, Kenichi and Valencia, Fabian V., Central Bank Independence and Macro-Prudential Regulation (April 23, 2012). IMF Working Paper No. 12/101. Available at SSRN: https://ssrn.com/abstract=2045036 or http://dx.doi.org/10.2139/ssrn.2045036

Kenichi Ueda

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033

Fabian V. Valencia (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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