Acentral bank,reserve bank,national bank, ormonetary authority is an institution that manages themonetary policy of acountry ormonetary union.[1] In contrast to acommercial bank, a central bank possesses amonopoly on increasing themonetary base. Many central banks also have supervisory or regulatory powers to ensure the stability ofcommercial banks in their jurisdiction, to preventbank runs, and, in some cases, to enforce policies on financialconsumer protection, and againstbank fraud,money laundering, orterrorism financing. Central banks play a crucial role in macroeconomic forecasting, which is essential for guiding monetary policy decisions, especially during times of economic turbulence.[2]
Central banks in mostdeveloped nations are usually set up to be institutionally independent from political interference,[3][4][5] even though governments typically have governance rights over them, legislative bodies exercise scrutiny, and central banks frequently do show responsiveness to politics.[6][7][8]
Issues like central bank independence, central bank policies, and rhetoric in central bank governors' discourse or the premises ofmacroeconomic policies[9] (monetary andfiscal policy) of thestate, are a focus of contention and criticism by some policymakers,[10] researchers,[11] and specialized business, economics, and finance media.[12][13]
Walter Bagehot, influential 19th-century theorist of the economic role of central banks
The notion of central banks as a separate category from other banks has emerged gradually, and only fully coalesced in the 20th century. In the aftermath ofWorld War I, leading central bankers of theUnited Kingdom and theUnited States respectively,Montagu Norman andBenjamin Strong, agreed on a definition of central banks that was bothpositive andnormative.[14]: 4-5 Since that time, central banks have been generally distinguishable from other financial institutions, except underCommunism in so-calledsingle-tier banking systems such as Hungary's between 1950 and 1987, where theHungarian National Bank operated alongside three other major state-owned banks.[15] For earlier periods, what institutions do or do not count as central banks is often not univocal.
Correlatively, different scholars have held different views about the timeline of emergence of the first central banks. A widely held view in the second half of the 20th century has been thatStockholms Banco (est. 1657), as the original issuer ofbanknotes, counted as the oldest central bank, and that consequently its successor theSveriges Riksbank was the oldest central bank in continuous operation, with theBank of England as second-oldest and direct or indirect model for all subsequent central banks.[16] That view has persisted in some early-21st-century publications.[17] In more recent scholarship, however, the issuance of banknotes has often been viewed as just one of several techniques to providecentral bank money, defined as financial money (in contrast tocommodity money) of the highest quality. Under that definition, municipal banks of the late medieval and early modern periods, such as theTaula de canvi de Barcelona (est. 1401) orBank of Amsterdam (est. 1609), issued central bank money and count as early central banks.[18]
There is no universal terminology for the name of a central bank. Early central banks were often the only or principal formal financial institution in their jurisdiction, and were consequently often named "bank of" the relevant city's or country's name, e.g. theBank of Amsterdam,Bank of Hamburg,Bank of England, orWiener Stadtbank. Naming practices subsequently evolved as more central banks were established. The expression "central bank" itself only appeared in the early 19th century, but at that time it referred to the head office of a multi-branched bank, and was still used in that sense byWalter Bagehot in his seminal 1873 essayLombard Street.[19]: 9 During that era, what is now known as a central bank was often referred to as abank of issue (French:institut d'émission,German:Notenbank). The reference to central banking in the current sense only became widespread in the early 20th century.
Names of individual central banks include, with references to the date when the bank acquired its current name:
The widespread adoption of central banking is a rather recent phenomenon. At the start of the 20th century, approximately two-thirds of sovereign states did not have a central bank. Waves of central bank adoption occurred in the interwar period and in the aftermath of World War II.[20]
In the 20th century, central banks were often created with the intent to attract foreign capital, as bankers preferred to lend to countries with a central bank on the gold standard.[20]
The use ofmoney as a unit of account predates history. Government control of money is documented in theancient Egyptian economy (2750–2150 BCE).[21] The Egyptians measured the value of goods with a central unit calledshat. Like many other currencies, the shat was linked togold. The value of a shat in terms of goods was defined by government administrations. Other cultures inAsia Minor later materialized their currencies in the form of gold and silvercoins.[22]
The mere issuance ofpaper currency or other types of financial money by a government is not the same as central banking. The difference is that government-issued financial money, as present e.g. inChina during theYuan dynasty in the form of paper currency, is typically not freelyconvertible and thus of inferior quality, occasionally leading tohyperinflation.
From the 12th century, a network of professionalbanks emerged primarily inSouthern Europe (including Southern France, with theCahorsins).[23] Banks could use book money to createdeposits for their customers. Thus, they had the possibility to issue, lend and transfer money autonomously without direct control from political authorities.
Interior of theLlotja de Barcelona where the city'sTaula de canvi was operated
TheTaula de canvi de Barcelona, established in 1401, is the first example of municipal, mostly public banks which pioneered central banking on a limited scale. It was soon emulated by theBank of Saint George in theRepublic of Genoa, first established in 1407, and significantly later by theBanco del Giro in theRepublic of Venice and by a network of institutions inNaples that later consolidated intoBanco di Napoli. Notable municipal central banks were established in the early 17th century in leading northwestern European commercial centers, namely theBank of Amsterdam in 1609[24] and theHamburger Bank in 1619.[25] These institutions offered a public infrastructure for cashless international payments.[26] They aimed to increase the efficiency of international trade and to safeguard monetary stability. These municipal public banks thus fulfilled comparable functions to modern central banks.[27]
The Swedish central bank, known since 1866 asSveriges Riksbank, was founded inStockholm in 1664 from the remains of the failedStockholms Banco and answered to theRiksdag of the Estates, Sweden's early modern parliament.[28] One role of the Swedish central bank was lending money to the government.[29]
The establishment of theBank of England was devised byCharles Montagu, 1st Earl of Halifax, following a 1691 proposal byWilliam Paterson.[30] Aroyal charter was granted on 27 July 1694 through the passage of theTonnage Act.[31] The bank was given exclusive possession of the government's balances, and was the only limited-liability corporation allowed to issuebanknotes.[32][page needed] The early modern Bank of England, however, did not have all the functions of a today's central banks, e.g. to regulate the value of the national currency, to finance the government, to be the sole authorized distributor of banknotes, or to function as alender of last resort to banks suffering aliquidity crisis.
Central banks were established in many European countries during the 19th century.[34][35] Napoleon created theBanque de France in 1800, in order to stabilize and develop the French economy and to improve the financing of his wars.[36] The Bank of France remained the most important Continental European central bank throughout the 19th century.[37] TheBank of Finland was founded in 1812, soon after Finland had been taken over from Sweden by Russia to become agrand duchy.[38] Simultaneously, a quasi-central banking role was played by a small group of powerful family-run banking networks, typified by theHouse of Rothschild, with branches in major cities across Europe, as well asHottinguer in Switzerland andOppenheim in Germany.[39][40]
The theory of central banking, even though the name was not yet widely used, evolved in the 19th century.Henry Thornton, an opponent of thereal bills doctrine, was a defender of the bullionist position and a significant figure in monetary theory. Thornton's process of monetary expansion anticipated the theories ofKnut Wicksell regarding the "cumulative process which restates the Quantity Theory in a theoretically coherent form". As a response to a currency crisis in 1797, Thornton wrote in 1802An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, in which he argued that the increase in paper credit did not cause the crisis. The book also gives a detailed account of the British monetary system as well as a detailed examination of the ways in which the Bank of England should act to counteract fluctuations in the value of the pound.[41]
In the United Kingdom until the mid-nineteenth century, commercial banks were able to issue their own banknotes, and notes issued by provincial banking companies were commonly in circulation.[42] Many consider the origins of the central bank to lie with the passage of theBank Charter Act 1844.[16] Under the 1844 Act,bullionism was institutionalized in Britain,[43] creating a ratio between the gold reserves held by theBank of England and the notes that the bank could issue.[44] The Act also placed strict curbs on the issuance of notes by the country banks.[44] The Bank of England took over a role of lender of last resort in the 1870s after criticism of its lacklustre response to the failure ofOverend, Gurney and Company. The journalistWalter Bagehot wrote on the subject inLombard Street: A Description of the Money Market, in which he advocated for the bank to officially become alender of last resort during acredit crunch, sometimes referred to as "Bagehot's dictum".
The 19th and early 20th centuries central banks in most of Europe andJapan developed under the internationalgold standard.Free banking orcurrency boards were common at the time.[citation needed] Problems with collapses of banks during downturns, however, led to wider support for central banks in those nations which did not as yet possess them, for example in Australia.[citation needed] In the United States, the role of a central bank had been ended in the so-calledBank War of the 1830s by PresidentAndrew Jackson.[45] In 1913, the U.S. created theFederal Reserve System through the passing ofThe Federal Reserve Act.[46]
Brazil established a central bank in 1945, which was a precursor to theCentral Bank of Brazil created twenty years later. After gaining independence, numerous African and Asian countries also established central banks or monetary unions. TheReserve Bank of India, which had been established during British colonial rule as a private company, was nationalized in 1949 following India's independence. By the early 21st century, most of the world's countries had a national central bank set up as apublic sector institution, albeit with widely varying degrees of independence.
Colonial, extraterritorial and federal central banks
Head office of the Bank of Java in Batavia, early 20th century
Before the near-generalized adoption of the model of national public-sector central banks, a number of economies relied on a central bank that was effectively or legally run from outside their territory. The first colonial central banks, such as theBank of Java (est. 1828 inBatavia),Banque de l'Algérie (est. 1851 inAlgiers), orHongkong and Shanghai Banking Corporation (est. 1865 inHong Kong), operated from the colony itself. Following the generalization of the transcontinental use of theelectrical telegraph usingsubmarine communications cable, however, new colonial banks were typically headquartered in the colonial metropolis; prominent examples included the Paris-basedBanque de l'Indochine (est. 1875),Banque de l'Afrique Occidentale (est. 1901), andBanque de Madagascar (est. 1925). The Banque de l'Algérie's head office was relocated from Algiers to Paris in 1900.
In some cases, independent countries which did not have a strong domestic base ofcapital accumulation and were critically reliant on foreign funding found advantage in granting a central banking role to banks that were effectively or even legally foreign. A seminal case was theImperial Ottoman Bank established in 1863 as a French-British joint venture, and a particularly egregious one was the Paris-basedNational Bank of Haiti (est. 1881) which captured significant financial resources from the economically struggling albeit independent nation ofHaiti.[47] Other cases include the London-basedImperial Bank of Persia, established in 1885, and the Rome-basedNational Bank of Albania, established in 1925. TheState Bank of Morocco was established in 1907 with international shareholding and headquarters functions distributed between Paris andTangier, a half-decade before the country lost its independence. In other cases, there have been organized currency unions such as theBelgium–Luxembourg Economic Union established in 1921, under which Luxembourg had no central bank, but that was managed by a national central bank (in that case theNational Bank of Belgium) rather than a supranational one. The present-dayCommon Monetary Area of Southern Africa has comparable features.
Yet another pattern was set in countries where federated or otherwise sub-sovereign entities had wide policy autonomy that was echoed to varying degrees in the organization of the central bank itself. These included, for example, theAustro-Hungarian Bank from 1878 to 1918, the U.S.Federal Reserve in its first two decades, theBank deutscher Länder between 1948 and 1957, or theNational Bank of Yugoslavia between 1972 and 1993. Conversely, some countries that are politically organized as federations, such as today's Canada, Mexico, or Switzerland, rely on a unitary central bank.
The primary role of central banks is usually to maintainprice stability, which can be defined as a specific level of inflation.Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to a currency. Most central banks currently have aninflation target close to 2%. Alternative approaches to price stability include stability ofprice indices over longer time periods.[49]
Since inflation lowersreal wages,Keynesians view inflation as the solution to involuntary unemployment. However, "unanticipated" inflation leads to lender losses as the real interest rate will be lower than expected. Thus, Keynesian monetary policy aims for a steady rate of inflation.
Central banks as monetary authorities in representative states are intertwined through globalized financial markets. As a regulator of one of the most widespread currencies in the global economy, the US Federal Reserve plays an outsized role in the international monetary market. Being the main supplier and rate adjusted for US dollars, the Federal Reserve implements a set of requirements to control inflation and unemployment in the US.[50]
Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. Unemployment beyond frictional unemployment is classified as unintended unemployment. For example,structural unemployment is a form of unintended unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Macroeconomic policy generally aims to reduce unintended unemployment.
Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.—John Maynard Keynes,The General Theory of Employment, Interest and Money p1
Economic growth can be enhanced by investment incapital, such as more or better machinery. A low interest rate implies that firms can borrow money to invest in their capital stock and pay less interest for it. Lowering the interest is therefore considered to encourage economic growth and is often used to alleviate times of low economic growth. On the other hand, raising the interest rate is often used in times of high economic growth as a contra-cyclical device to keep the economy from overheating and avoid market bubbles.
Further goals of monetary policy are stability of interest rates, of the financial market, and of the foreign exchange market.Goals frequently cannot be separated from each other and often conflict. For example,deficit spending tends to increase inflation.[51] Goals must therefore be carefully weighed before policy implementation.
In January 2020, theEuropean Central Bank has announced[55] it will consider climate considerations when reviewing its monetary policy framework.
Proponents of "green monetary policy" are proposing that central banks include climate-related criteria in their collateral eligibility frameworks, when conducting asset purchases and also in their refinancing operations.[56] But critics such asJens Weidmann are arguing it is not central banks' role to conduct climate policy.[57] China is among the most advanced central banks when it comes to green monetary policy.[58] It has given green bonds preferential status to lower their yield[59] and uses window policy to direct green lending.[60]
The implications of potentialstranded assets in the economy highlights one example of the embedded transition risk to climate change with potentialcascade effects throughout thefinancial system.[61][62][63] In response, four broad types of interventions including methodology development, investor encouragement,financial regulation and policy toolkits have been adopted by or suggested for central banks.[20]
Achieving the2°C threshold revolve in part around the development of climate-aligned financial regulations. A significant challenge lies in the lack of awareness among corporations and investors, driven by poor information flow and insufficient disclosure.[20] To address this issue, regulators and central banks are promoting transparency,integrated reporting, and exposure specifications, with the goal of promoting long-term, low-carbon emission goals, rather than short-term financial objectives.[20][64] These regulations aim to assess risk comprehensively, identifyingcarbon-intensive assets and increasing their capital requirements. This should result in high-carbon assets becoming less attractive while favoring low-carbon assets, which have historically been perceived as high-risk, and lowvolatilityinvestment vehicles.[20][65][66]
Quantitative easing is a potential measure that could be applied by Central banks to achieve a low-carbon transition.[20] Although there is a historical bias toward high-carbon companies, included in Central banks portfolios due to their high credit ratings, innovative approaches to quantitative easing could invert this trend to favor low-carbon assets.[20][67][68]
Considering the potential impact of central banks on climate change, it is important to consider the mandates of central banks. The mandate of a central bank can be narrow, meaning only a few objectives are given, limiting the ability of a central bank to include climate change in its policies.[20] However, central bank mandates may not necessarily have to be modified to accommodate climate change-related activities.[20] For example, theEuropean Central Bank has incorporated carbon-emissions into its asset purchase criteria, despite its relatively narrow mandate that focuses on price stability.[69]
Banking supervision: regulating and supervising thebanking industry, and currency exchange;
Payments system: managing or supervising means of payments and inter-banking clearing systems;
Coins and notes issuance;
Other functions of central banks may include economic research, statistical collection, supervision of deposit guarantee schemes, advice to government in financial policy.
At the most basic level, monetary policy involves establishing what form of currency the country may have, whether afiat currency,gold-backed currency (disallowed for countries in theInternational Monetary Fund),currency board or acurrency union. When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form ofpromissory note: "money" under certain circumstances. Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies arefiat money, the "promise to pay" consists of the promise to accept that currency to pay for taxes.
A central bank may use another country's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by theBulgarian National Bank,Hong Kong andLatvia (until 2014), the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency.Similar to commercial banks, central banks hold assets (government bonds, foreign exchange, gold, and other financial assets) and incur liabilities (currency outstanding). Central banks create money by issuingbanknotes and loaning them to the government in exchange for interest-bearing assets such as government bonds. When central banks decide to increase the money supply by an amount which is greater than the amount their national governments decide to borrow, the central banks may purchase private bonds or assets denominated in foreign currencies.
TheEuropean Central Bank remits its interest income to the central banks of the member countries of the European Union. The USFederal Reserve remits most of its profits to the U.S. Treasury. This income, derived from the power to issue currency, is referred to asseigniorage, and usually belongs to the national government. The state-sanctioned power to create currency is called theRight of Issuance. Throughout history, there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income.The expression "monetary policy" may also refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority.
The primary monetary policy tool available to central banks is the administered interest rate paid on qualifying deposits held with them. Adjusting this rate up or down influences the rate commercial banks pay on their own customer deposits, which in turn influences the rate that commercial banks charge customers for loans.
A central bank affects the monetary base throughopen market operations, if its country has a well developed market for its government bonds. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, repurchase agreements or "repos", company bonds, or foreign currencies, in exchange for money on deposit at the central bank. Those deposits are convertible to currency, so all of these purchases or sales result in more or less base currency entering or leaving market circulation.
If the central bank wishes to decrease interest rates, it reduces its administered rates (Bank Rate, thereverse repurchase agreement rate and thediscount rate). This results in commercial banks bidding down the rate they pay customers on their deposits and, subsequently, loan rates are reduced commensurately. Cheaper credit can increaseconsumer spending or business investment, stimulating output growth. On the other hand, cheaper interest income can reduce spending, suppressing output. Additionally, when business loans are more affordable, companies can expand to keep up with consumer demand. They ultimately hire more workers, whose incomes increase, which in its turn also increases the demand. This method is usually enough to stimulate demand and drive economic growth to a higher rate. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of theUnited States, theFederal Reserve targets thefederal funds rate, the rate at which member banks lend to one another overnight; however, themonetary policy of China (since 2014) is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies.
A third alternative is to changereserve requirements. The reserve requirement refers to the proportion of total liabilities that banks must keep on hand overnight, either in its vaults or at the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. Lowering the reserve requirement frees up funds for banks to buy other profitable assets. However, even though this tool immediately increases liquidity, central banks rarely change the reserve requirement because doing so frequently adds uncertainty to banks' planning. Most modern central banks now have zero formal reserve requirement.
Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to asunconventional monetary policy. These includecredit easing,quantitative easing,forward guidance, andsignalling.[70] In credit easing, a central bank purchases private sector assets to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for lower interest rates in the future. For example, during the credit crisis of 2008, theUS Federal Reserve indicated rates would be low for an "extended period", and theBank of Canada made a "conditional commitment" to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010.
Some have envisaged the use of what Milton Friedman once called "helicopter money" whereby the central bank would make direct transfers to citizens[71] in order to lift inflation up to the central bank's intended target. Such policy option could be particularly effective at the zero lower bound.[72]
Since 2017, prospect of implementingCentral Bank Digital Currency (CBDC) has been in discussion.[73] As of the end of 2018, at least 15 central banks were considering to implementing CBDC.[74] Since 2014, the People's Bank of China has been working on a project for digital currency to make its own digital currency and electronic payment systems.[75][76]
In some countries a central bank, through its subsidiaries, controls and monitors the banking sector. In other countries banking supervision is carried out by a government department such as theUK Treasury, or by an independent government agency, for example, UK'sFinancial Conduct Authority. It examines the banks'balance sheets and behaviour and policies toward consumers.[clarification needed] Apart from refinancing, it also provides banks with services such as transfer of funds, bank notes and coins or foreign currency. Thus it is often described as the "bank of banks".
Many countries will monitor and control the banking sector through several different agencies and for different purposes. TheBank regulation in the United States for example is highly fragmented with 3 federal agencies, theFederal Deposit Insurance Corporation, theFederal Reserve Board, orOffice of the Comptroller of the Currency and numerous others on the state and the private level. There is usually significant cooperation between the agencies. For example,money center banks,deposit-taking institutions, and other types of financial institutions may be subject to different (and occasionally overlapping) regulation. Some types of banking regulation may be delegated to other levels of government, such as state or provincial governments.
Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergers and are wary of concentration in this industry due to the danger ofgroupthink and runaway lending bubbles based on asingle point of failure, thecredit culture of the few large banks.
Central banks have increasingly engaged in public communication to ensure accountability, build trust, and manage inflation expectations.[77] Various aspects of central bank communication are also analyzed, including textual content through text mining techniques,[78] facial expressions during press conferences,[79] vocal characteristics,[80] and the clarity and readability of monetary policy announcements.[81]
Central bank independence versus inflation. This often cited[82] research published by Alesina and Summers (1993)[83] is used to show why it is important for a nation's central bank (i.e.-monetary authority) to have a high level of independence. This chart shows a clear trend towards a lower inflation rate as the independence of the central bank increases. The generally agreed upon reason independence leads to lower inflation is that politicians have a tendency to create too much money if given the opportunity to do it.[83] The Federal Reserve System in the United States is generally regarded as one of the more independent central banks.
Numerous governments have opted to make central banks independent. The economic logic behind central bank independence is that when governments delegate monetary policy to an independent central bank (with an anti-inflationary purpose) and away from elected politicians, monetary policy will not reflect the interests of the politicians. When governments control monetary policy, politicians may be tempted to boost economic activity in advance of an election to the detriment of the long-term health of the economy and the country. As a consequence, financial markets may not consider future commitments to low inflation to be credible when monetary policy is in the hands of elected officials, which increases the risk of capital flight. An alternative to central bank independence is to havefixed exchange rate regimes.[84][85][86]
Governments generally have some degree of influence over even "independent" central banks; the aim of independence is primarily to prevent short-term interference. In 1951, theDeutsche Bundesbank became the first central bank to be given full independence, leading this form of central bank to be referred to as the "Bundesbank model", as opposed, for instance, to the New Zealand model, which has a goal (i.e. inflation target) set by the government.
Central bank independence is usually guaranteed by legislation and the institutional framework governing the bank's relationship with elected officials, particularly the minister of finance. Central bank legislation will enshrine specific procedures for selecting and appointing the head of the central bank. Often the minister of finance will appoint the governor in consultation with the central bank's board and its incumbent governor. In addition, the legislation will specify banks governor's term of appointment. The most independent central banks enjoy a fixed non-renewable term for the governor in order to eliminate pressure on the governor to please the government in the hope of being re-appointed for a second term.[87] Generally, independent central banks enjoy both goal and instrument independence.[88]
Despite their independence, central banks are usually accountable at some level to government officials, either to the finance ministry or to parliament. For example, the Board of Governors of the U.S. Federal Reserve are nominated by theU.S. president and confirmed by theSenate,[89] publishes verbatim transcripts, and balance sheets are audited by theGovernment Accountability Office.[90] Central banks can be accountable andlegitimized through laws.[48]
In the 1990s there was a trend towards increasing the independence of central banks as a way of improving long-term economic performance.[91] While a large volume of economic research has been done to define the relationship between central bank independence and economic performance, the results are ambiguous.[92]
The literature on central bank independence has defined a cumulative and complementary number of aspects:[93][94]
Institutional independence: The independence of the central bank is enshrined in law and shields central banks from political interference. In general terms, institutional independence means that politicians should refrain from seeking to influence monetary policy decisions, while symmetrically central banks should also avoid influencing government politics.
Goal independence: The central bank has the right to set its own policy goals, whether inflation targeting, control of the money supply, or maintaining afixed exchange rate. While this type of independence is more common, many central banks prefer to announce their policy goals in partnership with the appropriate government departments. This increases the transparency of the policy-setting process and thereby increases the credibility of the goals chosen by providing assurance that they will not be changed without notice. In addition, the setting of common goals by the central bank and the government helps to avoid situations where monetary and fiscal policy are in conflict; a policy combination that is clearly sub-optimal.
Functional & operational independence: The central bank has the independence to determine the best way of achieving its policy goals, including the types of instruments used and the timing of their use. To achieve its mandate, the central bank has the authority to run its own operations (appointing staff, setting budgets, and so on.) and to organize its internal structures without excessive involvement of the government. This is the most common form of central bank independence. The granting of independence to the Bank of England in 1997 was, in fact, the granting of operational independence; the inflation target continued to be announced in the Chancellor's annual budget speech to Parliament.
Personal independence: The other forms of independence are not possible unless central bank heads have a highsecurity of tenure. In practice, this means that governors should hold long mandates (at least longer than the electoral cycle) and a certain degree of legal immunity.[95] One of the most common statistical indicators used in the literature[citation needed] as a proxy for central bank independence is the "turn-over-rate" of central bank governors. If a government is in the habit of appointing and replacing the governor frequently, it clearly has the capacity to micro-manage the central bank through its choice of governors.
Financial independence: central banks have full autonomy on their budget, and some are even prohibited from financing governments. This is meant to remove incentives from politicians to influence central banks.
Legal independence : some central banks have their own legal personality, which allows them to ratify international agreements without the government's approval (like theECB), and to go to court.
There is very strong consensus among economists that an independent central bank can run a more credible monetary policy, making market expectations more responsive to signals from the central bank.[99] Both the Bank of England (1997) and the European Central Bank have been made independent and follow a set of publishedinflation targets so that markets know what to expect.[citation needed]Populism can reduce de facto central bank independence.[100]International organizations such as theWorld Bank, theBank for International Settlements (BIS) and theInternational Monetary Fund (IMF) strongly support central bank independence. This results, in part, from a belief in the intrinsic merits of increased independence. The support for independence from theinternational organizations also derives partly from the connection between increased independence for the central bank and increased transparency in the policy-making process. The IMF'sFinancial Services Action Plan (FSAP) review self-assessment, for example, includes a number of questions about central bank independence in the transparency section. An independent central bank will score higher in the review than one that is not independent.[citation needed]
Central bank independence indices allow a quantitative analysis of central bank independence for individual countries over time. One central bank independence index is the Garriga CBI.[101]
Collectively, central banks purchase less than 500 tonnes ofgold each year, on average (out of an annual global production of 2,500–3,000 tonnes).[102] In 2018, central banks collectively hold over 33,000 metric tons of the gold, about a fifth of all the gold ever mined, according to Bloomberg News.[103]
In 2016, 75% of the world's central-bank assets were controlled by four centers inChina, the United States, Japan and theeurozone. The central banks ofBrazil,Switzerland,Saudi Arabia, theU.K.,India andRussia, each account for an average of 2.5 percent. The remaining 107 central banks hold less than 13 percent. According to data compiled byBloomberg News, the top 10 largest central banks owned $21.4 trillion in assets, a 10 percent increase from 2015.[104]Following is a ranking of the 5 biggest:
^Compare:Uittenbogaard, Roland (2014).Evolution of Central Banking?: De Nederlandsche Bank 1814–1852. Cham (Switzerland): Springer. p. 4.ISBN9783319106175.Archived from the original on 1 July 2023. Retrieved3 February 2019.Although it is difficult to define central banking, ... a functional definition is most useful. ... Capie et al. (1994) define a central bank as the government's bank, the monopoly note issuer and lender of last resort.
^David Fielding, "Fiscal and Monetary Policies in Developing Countries" inThe New Palgrave Dictionary of Economics (Springer, 2016), p. 405: "The current norm in OECD countries is an institutionally independent central bank ... In recent years some non-OECD countries have introduced ... a degree of central bank independence and accountability."
^Apel, Emmanuel (November 2007). "1".Central Banking Systems Compared: The ECB, The Pre-Euro Bundesbank and the Federal Reserve System. Routledge. p. 14.ISBN978-0415459228.
^Metcalf, William E. The Oxford Handbook of Greek and Roman Coinage, Oxford: Oxford University Press, 2016, pp. 43–44
^Collins, Christopher.The Oxford Encyclopedia of Economic History, Volume 3. Banking: Middle Ages and Early Modern Period, Oxford University Press, 2012, pp. 221–225
^Collins, Christopher.The Oxford Encyclopedia of Economic History, Volume 3. Banking: Middle Ages and Early Modern Period, Oxford University Press, 2012, p. 223
^Kurgan-van Hentenryk, Ginette.Banking, Trade and Industry: Europe, America and Asia from the Thirteenth to the Twentieth Century, Cambridge University Press, 1997, p. 39
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