Twin Peaks and Central Banks: Economics, Political Economy and Comparative Analysis

24 Pages Posted: 9 Jan 2018

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics

Davide Romelli

Trinity College (Dublin) - Department of Economics; Trinity College (Dublin)

Date Written: December 2017

Abstract

One of the fundamental issue in implementing the twin peaks regime is deciding where the prudential supervisor should be housed, given that so far three options has been explored, i.e. the prudential supervisor could be outside the central bank, or be a subsidiary of the central bank, or be completely inside the central bank. In other words the key question is to define the central bank involvement in the twin peaks model. The aim of the chapter is twofold: first of all we offer a systematic review of the economics and politics of the central bank involvement in a twin peak regime. Therefore and secondly we analyse the central bank position in the countries that already adopted the twin peak model, in order to better understand how the general theoretical and empirical results already obtained in exploring the central bank involvement in supervision can be applied in analysing the actual twin peaks regimes. Analysing the establishment of the twin peaks regime in Australia, Belgium, the Netherlands, New Zealand and United Kingdom it has been confirmed the heterogeneity of the central bank involvement as prudential supervisor, and on average that two drivers seems to be relevant in motivating the incumbent policymakers in reforming their supervisory settings: the necessity to address and fix the consequences of a systemic crisis (crisis driver); the opportunity to implement a supervisory change when the share of peer countries undertaking reforms is higher (bandwagon driver). On this respect, the true outlier seems to the Australian case, where the relevance of the two drivers is completely absent. The inertia effect – i.e. lagged reform due to the risks in implementing it ‐ seems to be evident only in the UK case.

Keywords: Twin Peaks Model, Prudential Supervision, Central Banking, Monetary Policy, Australia, Belgium, Netherlands, New Zealand, United Kingdom

JEL Classification: E58, E63, G18

Suggested Citation

Masciandaro, Donato and Romelli, Davide, Twin Peaks and Central Banks: Economics, Political Economy and Comparative Analysis (December 2017). BAFFI CAREFIN Centre Research Paper No. 2017-68, Available at SSRN: https://ssrn.com/abstract=3098098 or http://dx.doi.org/10.2139/ssrn.3098098

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Davide Romelli

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster D2
Ireland

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