Central Bank Independence and Financial Stability: Orthodox and Heterodox Approaches
a Ternopil National Economic University, Ternopil, Ukraine

This study argues that post-crisis discussions on central bank independence are less about a choice of a level of independence but more about a relation between the independence and the central bank mandate in financial stability. An offered hypothesis states that an increasing role of financial factors in the macroeconomic policy agenda has led to emerging of two approaches to the central bank independence. Within the orthodox approach, responsibility for the financial stability is a challenge to the accepted model: one mandate – one goal – one instrument. Interference into the financial cycle impairs transparency and distorts responsibility, while deflation bias risks get in conflict with price stability principles, adherence to which is exactly what central banks are granted independence for. In terms of the heterodox approach, a wider responsibility of central banks for financial stability requires more independence to protect the legitimacy of interference into the financial cycle and implementation of a more prudent regulatory regime. Orthodox view is contradictory in its nature, while the vulnerability of the second approach lies in quality of institutional environment. Price stability mandate is argued to remain the first priority, while the financial stability issues should be institutionalized in a clearer way to secure independence.

Publication History
Avaliable online 29 March 2017
Full Text
Cite as: Koziuk, V. (2017). Central Bank Independence and Financial Stability: Orthodox and Heterodox Approaches. Visnyk of the National Bank of Ukraine, 239, 6-27. https://doi.org/10.26531/vnbu2017.239.006
Citation Format


Acemoglu, D., Johnson, S., Querubin, P., Robinson, J. (2008). When does policy reforms works? The case of central bank independence. Working Paper, 14033. Cambridge: National Bureau of Economic Research. https://doi.org/10.3386/w14033

Acharya, V. (2015). Financial stability in the broader mandate for central banks: A political economy perspective. Hutchins Center on Fiscal and Monetary Policy at Brookings, Working Paper, 11, 1-19.

Arnone, M., Laurence, B., Segalotto, J-F., Sommer, M. (2007). Central bank autonomy: Lessons from global trends. Working Paper, 88. International Monetary Fund. https://doi.org/10.5089/9781451866520.001

Arnone, M., Laurens, B., Segalotto, J-F. (2006). The measurement of central bank autonomy: Survey of models, indicators, and empirical evidence. Working Paper, 227. Internationaly Monetary Fund. https://doi.org/10.5089/9781451864878.001

Balls, E., Howart, J., Stansbury, A. (2016). Central bank independence revisited: After the financial crisis, what should a model central bank look like? Working Paper, 67. Mossavar-Rahmani Center for Business and Government.

Bauducco, S., Bulir, A., Cihak, M. (2008). Taylor Rule Under Financial Instability. Working Paper, 18. International Monetary Fund. https://doi.org/10.5089/9781451868807.001

Bayoumi, T., Dell’Ariccia, G., Habermeier, K. Mancini-Griffoli, T., Valencia, F. (2014). Monetary policy in the new normal. Staff Discussion Note, 3. International Monetary Fund. https://doi.org/10.5089/9781475561784.006

Berger, W., Kissmer, F. (2013). Central bank independence and financial stability: A tale of perfect harmony? European Journal of Political Economy, 31, 109-118. https://doi.org/10.1016/j.ejpoleco.2013.04.004

Bernanke, B., Gertler, M. (1999). Monetary policy and asset prices volatility. Federal Reserve Bank of Kansas City Economic Review. Issue QIV, 17-51.

BIS (2003). Monetary stability, financial stability and the business cycle: five views. BIS Papers, 8, 1-30.

BIS. (2011). Central bank governance and financial stability. A report of study group. Chair: S. Ingves, pp. 1-91.

BIS. (2016). 86th Annual Report. Basel. 

Blanchard, O., Dell’Ariccia, G., Mauro, P. (2010). Rethinking macroeconomic policy. Staff Discussion Note, 03. International Monetary Fund. https://doi.org/10.5089/9781455224982.004.a001

Blanchard, O., Dell’Ariccia, G., Mauro, P. (2013). Rethinking macroeconomic policy II: Getting granular. Staff Discussion Note, 03. International Monetary Fund. https://doi.org/10.5089/9781484363478.006

Blinder, A. (2012). Central bank independence and credibility during the crisis. Working Paper, 229. Grisword Center for Economic Policy Studies.

Bodea, Cr., Hicks, R. (2015). Price stability and central bank independence: discipline, credibility and democratic institutions. International Organization, 69(1), 35-61. https://doi.org/10.1017/S0020818314000277

Bordo, M. (2010). Central bank independence and financial crises in history. Oesterreichische Nationalbank 38th Economic Conference, pp. 29-34. Wiena.

Borio, C. (2006). Monetary and prudential policies at a crossroads? New Challenges in the New Century. Working Paper, 193, 2-28. BIS. https://doi.org/10.2139/ssrn.948135

Borio, C. (2014). Monetary policy and financial stability: What role in prevention and recovery? Working Paper, 440. BIS.

Borio, C., Lowe, Ph. (2004). Securing sustainable price stability: Should credit come back from the wilderness? Working Paper, 157. BIS. https://doi.org/10.2139/ssrn.782324

Borio, C., White, W. (2004). Whither monetary and financial stability? The implications of evolving policy regims. Working Paper, 147. BIS.

Bulir, A., Cihak, M. (2008). Central bankers’ dilemma when banks are vulnerable: to tighten or not to tighten? International Monetary Fund.

Carre, E., Pourroy, M., Couppey-Soubeyran, J., Plihon, D. (2012). Central banking after the crisis: Brave new world or back to the future? University of Paris Centre d’Economie de Paris Nord Papers, pp. 1-22.

Caruana, J. (2013). The changing nature of central bank independence. Panel remarks at Bank of Mexico International Conference on “Central Bank Independence – Progress and Challenges”, Mexico City, 14-15 October 2013, 1-4. https://doi.org/10.20955/wp.2013.017

Cecchetti, St., Li L. (2005). Do capital adequacy requirements matter for monetary policy? Working Paper, 11830. Cambridge: National Bureau of Economic Research. https://doi.org/10.3386/w11830

Cihak M. (2007). Central Bank Independence and Financial Stability. International Monetary Fund.

Cihak M. (2010). Price Stability, Financial Stability, and Central Bank Independence. Oesterreichische Nationalbank 38th Economic Conference, Wiena, pp. 45-55.

Crowe C., Meade E. (2008). Central banks independence and transparency: evolution and effectiveness. Working Paper, 119. International Monetary Fund.

Cukierman, A. (2008). Central bank independence and monetary policymaking institutions: past, present, and future. European Journal of Political Economy, 24(4), 722-736. https://doi.org/10.1016/j.ejpoleco.2008.07.007

Debelle, G., Fischer, St. (1994). How independent should a central bank be? Goals, guidelines, and constraints facing monetary policy. Federal Bank of Boston Conference Series, 38, 195-221.

Dincer, N., Eichengreen, B. (2014). Central bank transparency and independence: Updates and new measures. International Journal of Central Banking, 10(1), 189-253. https://doi.org/10.2139/ssrn.2579544

Eichengreen, B., El-Erian, M., Fraga, A., Ito, T., Pisani-Ferry, J., Prasad, E., Rajan, R., Ramos, M., Reinhart, C., Rey, H., Rodrick, D., Rogoff, K., Song Shin, H., Velasco, A., WeMder di Mauro, B., Yu, Y. (2011). Rethinking Central Banking: Committee on International Economic Policy and Reform. 

Garica Herrero, A., Del Rio, P. (2003). Financial stability and the design of monetary policy. Working Paper, 17. American University of Paris. https://doi.org/10.2139/ssrn.396980

Georgsson, M., Vredin, A., Somma,r P.A. (2015). The modern central bank’s mandate and the discussion following the financial crisis. Sveriges Riksbank Economic Review, 1, 7-42.

Grilli, V., Masciandro, D., Tabellini, G. (1991). Political and monetary institutions and public financial policies in the industrial countries. Economic Policy, 6(13), 341-392. https://doi.org/10.2307/1344630

Haan, J., Masciandro, D., Quintyn, M. (2008). Does central bank independence still matter. European Journal of Political Economy, 24(4), 717-721. https://doi.org/10.1016/j.ejpoleco.2008.09.005

IMF (2015). Monetary policy and financial stability. Staff Report, Sept., pp. 1-66.

Klomp, J., de Haan, J. (2009). Central bank independence and financial instability. Journal of Financial Stability, 5(4), 321-338. https://doi.org/10.1016/j.jfs.2008.10.001

Koziuk, V. (2009). Monetary foundations for global financial stability. TNEU, Scientific Thought.

Koziuk, V. (2015). Central banks independence after the global financial crisis: “Gray area of the status quo”. Visnyk of the National Bank of Ukraine, 228, 16-25.

Koziuk, V. (2015). Reserve Currencies: Perimeter of Global Instability. Ternopil. 

Koziuk, V. (2016). Independence of central banks in commodity economies. Visnyk of the National Bank of Ukraine, 235, 6-25. https://doi.org/10.26531/vnbu2016.235.006

Kydland, F., Prescott, E. (1977). Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy, 85(3), 473-492. https://doi.org/10.1086/260580

Masciandro, D., Quintyn, M., Taylor, M. (2008). Inside and outside the central bank: Independence and accountobility in financial supervision: Trends and determinants. European Journal of Political Economy, 24(4), 833-848. https://doi.org/10.1016/j.ejpoleco.2008.07.005

Orphanides, A. (2013). Is monetary policy overburdened? Working Paper, 435. BIS.

Reinhart, C., Rogoff, K. (2013). Shifting mandates: The federal reserve’s first centennial. NBER Working Paper, 18888. Cambridge: National Bureau of Economic Research. https://doi.org/10.3386/w18888

Rossi, S. (2013). Post-crisis challenges to central bank independence. The LBMA/LPPM Precious Metals Conference, 30 September 2013, pp. 1-9.

Schwartz, A. (1995). Why financial stability depends on price stability. Economic Affairs, 15, 21-25. https://doi.org/10.1111/j.1468-0270.1995.tb00493.x

Schwartz, A. (2002). Asset price inflation and monetary policy. Working Paper, 9321. Cambridge: National Bureau of Economic Research.

Smets, F. (2014). Financial stability and monetary policy: How closely interlinked? International Journal of Central Banking, 10(2), 263-300.

Svensson, L. (2012). Comment on Michael Woodford, “Inflation Targeting and Financial Stability”. Sveriges Riksbank Economic Review, 1, 33-39. 

Svensson, L. (2016). Cost-benefits analysis of leaning against the wind: Are costs larger also with less effective macroprudential policy? Working Paper, 3. International Monetary Fund. https://doi.org/10.5089/9781498314787.001

Ueda, K., Valencia, F. (2012). Central bank independence and macro-prudential regulation. Working Paper, 101. International Monetary Fund. https://doi.org/10.5089/9781475502916.001

Сecchetti, S. (2013). Central bank independence – a path less clear. Remarks at International Conference Held to Commemorate the 20th Anniversary of the Autonomy of the Bank of Mexico, Mexico City, 14 October 2013, pp. 1-6.

Rights and Permissions
This work is licensed under a Creative Commons Attribution 4.0 International License. The images or other third party material in this article are included in the article’s Creative Commons license, unless indicated otherwise in the credit line; if the material is not included under the Creative Commons license, users will need to obtain permission from the license holder to reproduce the material.
Submit Your Paper