Friday, September 14, 2007

Central Banks ,inflation and economic growth (II)

Because of its role and its influence, most of Central Banks are both independent and autonomous from political interests .The degree of independency , varies among different countries depending on their experience with past inflation. The degree of autonomy depends on the ability for pushing aside government pressures. Available evidence(Measures of central bank autonomy: Empirical evidence for OECD, developed and emerging markets economies. October 2006. WP06/228 :Arnone, Segalotto y Laurens), indicates that autonomy and independence have increased in a ten years period ranging from 1991 up to 2003. They use the GMT index ,and a revisited version of it based on Cukierman approach, for a smaller sample. Autonomy in particular, has increased in emerging economies and developing countries ,as much as economy autonomy. This improvement follows a three stage approach :
S1. To laid down the political fundamentals of Central Bank ´s job
S2. Operational autonomy development
S3. Central Banks get further autonomy in terms of policy formulation and appointment of senior management, due to changes in. Central Banks laws such as to increases its autonomy in the use of instruments.-.
OECD countries also have had an increase in political autonomy (setting of objectives such as price stability) as a consequence of European Central Bank converging to the Bundesbank model . Economic autonomy also has increased ,specially since the 1990,allowing to have a lower dispersion among different Central banks economic autonomy index.
Thus, no matter whether it is OECD or Emerging economy, there are a deeper sense of connexion and causal relationship ,between both economic and political autonomy and higher macroeconomic performance. The trend is for higher economic and political autonomy. Countries with high autonomy level can be found in PerĂº, Mexico, Brazil, Chile within the group of emerging economies.
Concerning political independence ,OECD CB ´s countries (45,4%of all cases )are more political independent than those CB from emerging (28,6%) or developing ones(26,0%). As far as economic independence is concern, OECD(36,2%), developing (32,7%)and emerging countries (31,0%),are evenly distributed..
Very much of all of this discussion is important in the current scenario of global markets volatility which means strong pressures upon Central Banks reaction function, to make quick and precise moves. According to the available data, Central Banks are in a very well endowed position to handle properly the current situation, away from political pressures, and keeping the risk balances properly between achievements in inflation and stable and not recessionary growth. However, the current volatility it is not just about CB interventions , but it is also about a credible approach to avoid a recession ,in the middle of a monetary program to reduce inflation, settle down the risk perception of massive default.. Which is the best option? .It is important to make the difference between fighting inflation (macroeconomic real setting),and avoiding a systemic crisis due to insolvency in housing markets (microeconomic financial setting ). Reducing the interest rate, might not have the expected effect upon a crisis defined by microeconomic parameter, rather than macroeconomic ones. Worse of all ,it might imply to risk the gains made on inflation control so far, such that sooner or later it will have to be raised again .Besides, with lower interest rate, Banks will not make a difference for debtors unable to pay their mortgage, because it has not changed their risk profile. Reprogramming debt program under special financing conditions might allow a better effect,even continuing adding cash to the financial system it is not a weak approach.-

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