Quarterly Bulletin
Central Banks Articles

Chief Economist Workshop April 2005: exchange rate regimes and capital flows (142k)
(by Gill Hammond of the Bank’s Centre for Central Banking Studies and Ole Rummel of the Bank’s Monetary Instruments and Markets Division). The second annual Chief Economist Workshop, organised by the Bank of England’s Centre for Central Banking Studies (CCBS), brought together economists from more than 30 central banks. It was part of CCBS’s programme of events to provide a forum for central bankers and academics to exchange views on central bank policies and to share specialist technical knowledge. The topic for this meeting was exchange rate regimes and capital flows, with a special emphasis on the choice of an appropriate exchange rate regime within the domestic monetary, fiscal and financial framework.

Central banks and financial stability (64k)
(by P J N Sinclair, Director, Centre for Central Banking Studies). Each year the Governors of many central banks are invited to the Bank of England for a symposium. The subject this year was financial stability. This article is based on Financial Stability and Central Banks, a written report presented to the 2000 Central Bank Governors' Symposium, which, among other things, analyses the results of a survey of central banks, outlining the scope and diversity of their financial stability activities. The article goes on to discuss financial crises and the morbidity of banks, the trade-off between competition and safety in the financial system, the international dimension to financial crises, the many links between financial stability policy and monetary policy, and the nature of the work of those charged with safeguarding financial stability.

Safeguarding financial stability is a core function of the modern central bank, no less than market operations and the conduct of monetary policy. This is evident from the detailed survey of central banks, drawn from a wide variety of industrial, transition and developing countries. For those central banks that have never acted as regulator or supervisor of financial institutions, and for those that have recently shed these roles, financial stability responsibilities may be shared with other agencies, but the central bank is still very much in the game. This is particularly true in circumstances where bank failure would pose systemic risk. Threats to financial stability may arise from many sources, including excessive competition or overcrowding in the banking sector, misguided or misapplied regulation or lending to troubled institutions, undue forbearance, and currency crises. Financial stability impinges upon monetary policy and reacts to it. There are therefore powerful arguments for retaining responsibility for both within the central bank.

The use of explicit targets for monetary policy: practical experiences of 91 economies in the 1990s
(50k)
(by Gabriel Sterne of the Bank of England's Centre for Central Banking Studies). In June 1999 the Bank of England hosted its sixth Central Bank Governors' Symposium. This year the subject was 'Monetary policy frameworks in a global context', based on a report prepared by DeAnne Julius of the Bank's Monetary Policy Committee and Maxwell Fry, Lavan Mahadeva, Sandra Roger and Gabriel Sterne of the Bank's Centre for Central Banking Studies (CCBS). In this article Gabriel Sterne draws on one of the chapters of the report. The report uses a survey of 91 central banks to assess developments in monetary frameworks across a wide cross-section of economies. The final report, along with a selection of papers originally presented at a CCBS Academic Workshop in November 1998, will be published by Routledge in mid 2000.

A monetary policy framework comprises 'the institutional arrangements under which monetary policy decisions are made and executed' (McNees (1987), page 3). Following the breakdown of the Bretton Woods system of exchange rates, policy-makers have employed a variety of monetary frameworks in order to increase the credibility of monetary policy. Since the key characteristic of the framework is often an explicit target for monetary policy, the aim of the article is to assess the use of such targets in a range of economies in the 1990s. The analysis is based on data provided by 91 central banks that responded to a questionnaire on monetary policy frameworks circulated by the Bank of England in late 1998.

Explicit monetary policy targets have become more widely used in the 1990s than at any time since the Bretton Woods era. In the survey of 91 central banks, 96% (all but four countries) were using some form of explicit target or monitoring range in 1998. This contrasts sharply with 1990, when only 55% had an explicit target or monitoring range.

The article assesses in detail the use of explicit targets. The first section of the article argues that the choice of policy target rests not just on the likelihood and utility of hitting a single number. Other important roles for explicit targets may include defining informal or formal contractual relationships between institutions, and focusing analysis on particular economic indicators.

The second section goes on to examine which targets have been adopted in the 1990s by the 91 countries sampled, and the degree of flexibility with which they have been implemented. The announcement of an explicit target can represent full commitment to a particular outcome, or it may be no more than a benchmark used to explain deviations from the target. The sample provides extremes of experience that include rigidly fixed exchange rates on the one hand, and loose monitoring ranges for one or all of the exchange rate, money and inflation on the other. In the case of domestic monetary targets, the data used in the article relating to the deviations of outcomes from targets indicate that, in many cases, targets have been implemented quite flexibly.

Developing voluntary domestic markets for government debt (53k)
For the Bank of England's 1995 Central Bank Governors' Symposium, Max Fry, Charles Goodhart and Alvaro Almeida surveyed the objectives, activities and independence of central banks in developing countries. One striking finding was that developing countries suffered considerably higher inflation than the OECD countries. While the proximate cause was more rapid money growth, their work suggested a more fundamental cause was that developing country governments resorted to their central banks much more for deficit financing. For the Bank of England's 1996 Central Bank Governors' Symposium, Max Fry was asked to investigate in more detail the ways in which governments finance their deficits.

How should central banks reduce inflation? - conceptual issues (131k)
In a paper prepared for the Symposium on 'Achieving Price Stability' sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Mervyn King, Executive Director and Chief Economist of the Bank of England discusses how quickly a central bank should reduce inflation to its desired level following an inflationary episode. He argues that a central bank is unlikely to wish to move immediately to price stability, since there are costs to disinflation and these costs increase more than proportionally with the rate of disinflation. These costs, which arise because economic agents have to learn about the central bank's commitment to price stability, also mean that a central bank may wish to react to shocks to output as well as to inflation. But Mervyn King stresses that any such response should be cautious in the period in which the private sector is still learning about the central bank's commitment to price stability.

Central bank independence and accountability: theory and evidence (33k)
(by Clive Briault, Andrew Haldane and Mervyn King, of the Monetary Analysis Divisions).
Accountability and transparency can help reduce the inflation bias that might otherwise result from discretionary policy-making. Accountability can serve as a partial substitute for reputation among central banks whose monetary frameworks have yet to establish themselves fully.

Inflation targets (44k)
(by Andrew Haldane of the Bank's Monetary Assessment and Strategy Division)
summarises a number of the main issues-both technical and conceptual-raised by the use of inflation targets as the basis for a monetary policy framework. It draws on some of the contributions made by representatives of those central banks that use inflation targets at a conference on the subject organised by the Bank earlier this year.