Inflation Versus Central Bank Independence? Banking Regulation and Financial Stability in the U.S. And Germany

WZB Discussion Paper No. 1011-9523

54 Pages Posted: 24 Oct 2004

See all articles by Sigurt Vitols

Sigurt Vitols

WZB Berlin Social Science Center

Date Written: November 1995

Abstract

Most recent discussion of the relationship between the banking system and macroeconomic performance have focused on the degree of independence of the central bank as the key variable influencing the choice between inflation and unemployment. This paper argues that the stability of the financial system is a goal of central banks with at least as much priority as the other two goals, and that tight money policies implemented to achieve monetary stability may conflict with the goal of financial system stability; furthermore, the nature of regulation and underlying health of the financial system is a crucial factor influencing the extent of the monetary versus financial system stability tradeoff dilemma. The erosion of prudential regulation and increasing weakness of large segments of the financial system in the US, in large part due to arbitrage between competing regulatory authorities, has since the 1960s put the Federal Reserve Board in the dilemma of controlling inflation versus protecting financial system stability. The German Bundesbank in contrast has had a freer reign in monetary policy, since corporatist bank regulation including strict prudential standards and the prohibition of potential bank competitors has resulted in a stronger underlying financial structure.

Keywords: Financial systems, regulation, banking

JEL Classification: G2, G3

Suggested Citation

Vitols, Sigurt, Inflation Versus Central Bank Independence? Banking Regulation and Financial Stability in the U.S. And Germany (November 1995). WZB Discussion Paper No. 1011-9523, Available at SSRN: https://ssrn.com/abstract=608202 or http://dx.doi.org/10.2139/ssrn.608202

Sigurt Vitols (Contact Author)

WZB Berlin Social Science Center ( email )

Reichpietschufer 50
D-10785 Berlin
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
341
Abstract Views
1,576
rank
97,370
PlumX Metrics