Central Bank Independence and the Global Financial Meltdown: A View from the Emerging Markets
The study made an examination of 91 countries over 1989-2008 and the effects of an independent central bank on different variables, including growth rate of GDP per capita, inflation, and credit to the private sector extended by the banking sector. The study breaks new ground in utilizing several different measures of bank “independence,” including using a “transparency index” that measures the openness of a central bank to public discussion.
The key results from the study include:
A long history of both central bank independence and transparency lowers interest rates for all economies, while rapid turnover of central bank governors raises them by a large amount.
Over the long run, an independent and transparent central bank should create the right conditions for growth, but in the short-term, price stability may lead to lower growth than would have been achieved if a central bank were acting politically.
Growth in bank credit appears to be much higher with transparent central banks than with non-transparent ones, possibly because a central banker still has the incentive to please his audience, which is more “the economy” and less “the government.”
Looking specifically at the BRIC (Brazil, Russia, India, China) economies, central bank independence from 2003 onward correlates with a strong positive effect on bank credit, meaning that independence appears to have fueled the root causes of the global recession rather than stemmed them.
The research concludes that central bank independence may not even matter for growth or inflation if the policies pursued still are erroneous. If central banks were independent during the credit boom of the early 2000s, perhaps it’s more important to wean both developed and emerging market bankers off bad models rather than make them more independent. Experimentation with different term-limits for bank governors, as well, may help to avoid some of the problems seen in the run-up to the crisis, removing the temptation to play God with the economy.