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A Note on the Independence and Governance of
Asia-Pacific Central Banks
By Neil Angelo C. Halcon 1 IT framework (Allen, Baumgartner, and Rajan, Mautonomy from national
governments, as well as improving their own However, historical accounts beg to differ. In many advanced economies, as well as in a stability objective. Central banks became number of emerging economies in the post- independent a few years after the publication development was seen as a crucial part of the inconsistency in macroeconomic policy by central bank’s responsibilities. Gerald Epstein Kydland and Prescott (1977), which called for long-term commitment from the central bank, return to the historical norm of central bank with the conduct of monetary policy devoid of policy: wherein goals such as employment creation and rapid economic growth should Consequently, the spate of financial bubbles join the goals of attaining price and financial and crises in the past two decades prompted market stability. The return of the central bank development had been further echoed by Dr. Joseph Stiglitz, who advocated that inflation targeting should be “abandoned”.3 The current rate of price increases in oil and food, and Central bank independence is important for inflation in developing nations are imported monetary authorities, and this independence from the United States and other oil-producing countries, would render an inflation targeting central bank as “not credible” and “powerless” in reducing domestic inflation at stable levels. A number of studies appear to support the notion that a higher level of central bank bandwagon. The goal of price stability had inflation (Bade and Parkin, 1988; Grilli, authority as the well-established feature of the Cukierman, 1992; Arnone, Laurens, Segalotto and Sommer, 2007). Interestingly, though, 2006). In this regime, other goals, such as Cornwall and Cornwall (1998), as well as Fuhrer (1997) and Kilponen (1999) found that unemployment rate, are being considered as a higher level of central bank independence “by-products” or subsequent outcomes of an could also lead to a higher unemployment 1 Bank Officer II, Department of Economic Research Under section 8 of the Reserve Bank of New Zealand Posted on the web on 8 May 2008, as opinion page for Act of 1989, the bank should formulate and implement Business Day (Johannesburg, South Africa). Dr. monetary policy with the intention of achieving price Stiglitz was a professor of economics at Columbia stability by the year ending December 1992. It is University, and was the 2001 Nobel Laureate in executed under the policy targets agreement between rate. These two separate findings suggest that central bank and its two agents: the national the Phillips curve principle postulated by government and the general public. Central Mankiw (2007) was valid in that society faces bank independence is a multi-faceted concept a short-run trade-off between inflation and exclusively focus its energies on pursuing Institutional independence – monetary price stability, or if it should include policy setting is the sole prerogative of the employment generation as a complementary central bank. Thus, it does not enter into policy objective for central banks in the Asia- directives by the national government nor Legal independence – a personality which Central Bank Independence
T1977 seminal paper made by 2004 • Personal independence – fixed and
secured terms of office for its decision inconsistency of economic policy. This refers office by any competent national authority to the difference between the optimal policies on the basis of civil service guidelines and that a central bank would announce if it were considered credible by the public, and the policies it would carry out after the public had Functional and operational independence expectations. In reality however, the public – the role of the monetary authority is central bank, and the resulting inflation rate utilization of instruments at its disposal. It will be higher than it needs to be. As a result, output may or may not rise above the full rigidities present in the system that prevents complete wage and price adjustments. The incentive of policymakers to promote surprise independence – full budgetary autonomy inflation is constrained by the behavior of in carrying out central banking tasks and rational agents, creating an economy with inflationary bias (Halcon and De Leon, 2004). Thus, an important aspect of any reform is to make it credible over a longer time horizon, emphasizing the need for time consistency in (2007) provided a global consensus of views on the principles of central banking autonomy as follows: (1) set price stability as the primary refers to the bank’s capability to formulate and objective of monetary policy; (2) curtail direct implement its monetary policy in pursuit of a lending to national governments; (3) ensure given mandate or primary objective (Abenoja, full autonomy for setting the policy rate; and 1995). It is viewed in consensus as separating the monetary authority from the affairs of the policy formulation. The sequencing of central bank reforms were also illustrated as follows: seigniorage – or net government revenues as Step 1 – clarifying the objectives and a direct result of government instructing the central bank to finance its deficits via the Step 2 – further strengthening instrument printing of money (Abel and Bernanke, 2005). autonomy; and Step 3 – further strengthening Thus, a relationship is formed between the Central Bank Governance
central bank communication as a governance component had gradually developed into a vital instrument in a central banker’s toolbox in Agovernance rely upon its
transparency. Analyzing for the principles of Inflation and Unemployment
good governance, he concluded that due to the various legal complexities and varying degrees of these pillars among nations, a “guidebook” similar to the IMF’s Code of Good Practices on Transparency in Monetary and among the most difficult and politically Financial Policies is the best option rather sensitive economic issues that policymakers than what William Poole visualized as an “optimal central bank law”. Moreover, Hall inflation generate intense public concern since (2003) stressed that there is no “one size fits their implications are direct and visible. Almost all” best practice governance framework after everyone is affected by rising prices, and few workers can be confident that they will never Australia and New Zealand – central banks lose their jobs. The Phillips curve illustrates who are under inflation targeting, as well as that based on United States data, a negative or an inverse relationship exists between authorities which place a major emphasis on exchange rate stability. Thus, central banks should continue aiming for monetary policy excellence and corporate governance on their own. In a recent working paper, Crowe and rates, as well as the current status of inflation targeting countries under the Asia-pacific independent central banks tend to be highly region, can be illustrated in Table 1. Countries such as New Zealand and Australia saw their positively correlated with measures of national unemployment rates declined considerably. In transparency practices are associated with the private sector making greater use of economies in the Asia-pacific region had seen information provided by the central bank. their inflation rates decline, but their unemployment rates increased. These trends Tuladhar (2005) emphasized that under the appear to support the notion of a possible governance structure of an inflation-targeting short-run trade-off between inflation and central bank, high transparency and public unemployment as represented in the Phillips accountability are deemed crucial since they are used for anchoring public expectations of accountability, target breaches need to be publicly examined in accordance with the terms set out when determining the inflation target. Also, Van der Cruijsen and Eijffinger (2007) observed the tendency that more substantial research are being devoted to improving central bank transparency and communication to the business sectors, the national government and the general public as a whole. Evidence shows that improved transparency and communication provides the ability to move financial markets, as well as the potential to help the central bank attain overall macroeconomic stability. Indeed, Table 1. Movement towards Inflation Targeting (I.T.), with Inflation and Unemployment Trends Source: Batini, et. al. (2006) and IMF (2006) "Inflation Targeting and the IMF", Tables 1 and 2 Notes: Selected Asia-Pacific countries. Average Inflation and Unemployment calculations by researcher. * Countries which sought Technical Assistance from the IMF. ** Countries which did not sought Technical Assistance from the IMF.
Results from the Pooled Least Squares
variables, two interesting observations were drawn: (1) the accountability/transparency component has a negative relationship with unemployment; and (2) the price stability Rdrawn: (1) the accountability/ component was negatively related in all the
three unemployment variables. This result significant on all regressions using the three validated the Epstein (2007) argument: that inflation variables; (2) the foreign exchange significant; and (3) inflation results were mixed, consistent with past studies that the relationships on the price stability objective between CBIG indices and inflation is still components of CBIG on both inflation and subject to further evaluation (See Table 2). unemployment variables show that Phelps’ claim (2006) was correct: that the inflation and unemployment relationship is also a matter of econometric exercise focused more on the which formulate structural policies. The “direction” of the beta coefficients, and not positive relationship with the legal, political, necessarily putting much emphasis on the individual and overall statistical significance of possibly increase the rate of unemployment. It Table 2. Econometric Results - Pooled Regression (Multivariate - Without Control Variables) Using Eviews 4.0 Notes: ** .01 level, * .05 level of significance. Values are in t-statistics. Method: Pooled Least Squares. Period: 1991-2005 / Cross-Sections: 25 / White Heteroskedasticity-Consistent Standard Errors and Covariance a Under STDEV unemployment, there are only 22 cross-sections / 3 were dropped due to insufficient number of observations Implications for Inflation Targeting Central
precursor for growth and development (North, 1990). Also, even if monetary policy actions midst the clarion call of Dr. Stiglitz to situation, central banks keep a constant and Apacific central banks under the close watch on any unusual or sudden
inflation targeting framework should not worry too much for two reasons: First, central bank independence was already established as an In the end, economic stability is anchored on successful inflation targeting but also for price stability, which ensures that a currency preserves its purchasing power and retains public trust. It also includes a stable financial affairs; and second, the inflation targeting system with a considerably vibrant capital market. This is the responsibility of central banks – for their monetary policy actions adjustments in policy interest rates – wherein ensures control of the price level over the fluctuations in the rate of unemployment, as well as on the adjustments in labor wages. Along with central bank independence, there is now also a widespread acceptance of the institutions, as well as having incentive References
Epstein, Gerald (2007), “Central Banks as Agents of Employment Creation”, United Nations / DESA Working Paper No. 38, Department of Economic “Central Bank Independence and Governance and Social Affairs, United Nations, N.Y., June. (CBIG) and Inflation in Asia-Pacific”, Monash University, Australia. Paper presented during the Fuhrer, J.C. (1997), “Central Bank Independence 12th Finsia-Melbourne Centre for Financial Studies Banking and Finance Conference, 25 September Paradigms for the Next Millennium”, New England Grilli, V., D. Masciandaro, et al. (1991), “Political Wickramanayake (2006) “Determinants of Central and Monetary Institutions and Public Financial Bank Independence and Governance: Problems Policies in Industrial Countries”, Economic Policy and Policy Implications” based on JOAAG Vol.1, Halcon, N. and L. De Leon (2004) “Efficiency of Allen, M., U. Baumgartner and R. Rajan, (2006), Fiscal and Monetary Policies in the Philippines: A “Inflation Targeting and the IMF”, Prepared by St. Louis Model Approach”, Bangko Sentral Monetary and Financial Systems Department, Policy and Development Review Department and Research Department, 16 March, International Hasan, Iftekhar and Mester, Loretta J. (2008), "Central Bank Institutional Structure and Effective Arnone, Marco, Bernard J. Laurens, Jean-Francois Evidence", Federal Reserve Board of Philadelphia Segalotto and Martin Sommer, (2007) “Central Bank Autonomy: Lessons from Global Trends” IMF Working Paper 07/88, International Monetary Kilponen, J. (1999) “Central bank independence and wage bargaining structure – empirical evidence”, Bank of Finland Discussion Paper Bade, R. and M. Parkin, (1988), “Central Bank Laws and Monetary Policy”. Department of Economics, University of Western Ontario, mimeo. Kydland, F. and E. Prescott (1977) “Rules Rather Than Discretion: The Inconsistency of Optimal Baltagi, B.H., (2001), Econometric Analysis of Plans”, The Journal of Political Economy. Vol. Panel Data. New York, John Wiley and Sons. Banaian, K. and W.A. Luksetich, (2001), “Central Lybeck, Tonny and JoAnne Morris, (2004) “Central Inflation Rates” Economic Inquiry, January. Management”, IMF Working Paper, International Monetary Fund, Washington, D.C., December. Unemployment costs of Inflation Targeting, Mankiw, N. Gregory, (2007) Principles of Economics, 4th edition, Thomson South-Western. Neyapti, B., (2003), “Budget Deficit and Inflation: The Roles of Central Bank Independence and Institutions: Past, Present and Future”, Paper Financial Market Development”, Contemporary presented at the annual meeting of the Chilean Economic Society at Vina del Mar, Chile. North, D.C. (1990), Institutions, Institutional Crowe, Christopher and Ellen E. Meade (2008), Change and Economic Performance, Cambridge “Central Bank Independence and Transparency: Evolution and Effectiveness”, IMF Working Paper Obben, James, (2006), “Does Central Bank Independence really offer a ‘Free Lunch’ to De Souza, L.V., (2002), “Integrated Monetary and Exchange Rate Frameworks”, Tinbergen Institute Discussion Papers 02-054/2, Tinbergen Institute. Posen, A. S. (1998), “Central Bank Independence Tetangco, Jr., Amando M., (2005) “Continuity in a and disinflationary credibility: a missing link”, Time of Change”, Inaugural Speech delivered at Oxford Economic Papers 50: 335-359. Ribeiro, F. (2002), “Central Bank: Independence, Tuladhar, Anita, (2007) “Governance Structures Governance and Accountability”, Institute of and Decision-Making Roles in Inflation Targeting Brazilian Issues, Minerva Program, George Central Banks”, IMF Working Paper 05/183, Washington University, Washington DC, USA. International Monetary Fund, Washington, D.C., Stiglitz, J. (2008), “The Urgent Need to Abandon Inflation Targeting”, Opinion Page for Business Van der Cruijsen, C.A.B. and Eijffinger, S.C.W. Day, Johannesburg, South Africa at (2007), “The Economic Impact of Central Bank Transparency: A Survey”, CEPR Discussion Paper Disclaimer: The views expressed in this publication are those
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acknowledgement of source is made. Please send comments, feedbacks and/or inquiries to: The BSP Economic Newsletter Editorial Staff, Room 401, 4/F, Five-Storey Bldg., Bangko Sentral ng Pilipinas, A. Mabini St., Malate, Manila 1004; telephone no. (632) 523-1190; fax no. (632) 523-1840. E-mail: [email protected].


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