Central Bank Independence – Lessons from History

In the aftermath of the Global Financial Crisis 2007-2009 central banks’ mandates have been expanded, and their tasks have increasingly brought them into territories normally handled by political authorities. In addition to price stability, there are concerns for sustainable growth, financial stability and a well-functioning payment system, which these days finds itself in rapid transition into a digital future many places. On top of this come concerns for climate, inequality and challenges which may be piling up post-Covid. These developments have taken many central banks, and their balance sheets, into unchartered territories.

In May 2018, the Bank of England hosted “The Old Lady in Retrospect: A workshop on lessons from the Bank of England’s History and Future Directions for Research”. The workshop took place in the home of Montagu Norman, the governor of Bank of England from 1920 to 1944.

Inspired by this event, Norges Bank set out to organize in 2020 a workshop to reflect on lessons from history of central banks and central banking as they pertain to current central bank issues. We chose as a moniker for this workshop Nicolai Rygg, the governor of Norges Bank from 1920 to 1946.

However, due to the Covid-19 pandemic the 2020 workshop had to be canceled. In its place Norges Bank has organized a Nicolai Rygg 2021 virtual panel debate on Central Bank Independence – Lessons from History. The event took place on Thursday 8 April 2021, 17:00-18:30 and was recorded on video. You’ll find the participants’ introductory remarks available in a blog format, here at Bankplassen blog.

Central Bank Independence – What We Know and What We Don’t

This article was initially prepared as the author’s introductory remarks to the Nicolai Rygg 2021 virtual panel debate on Central Bank Independence – Lessons from History, hosted by Norges Bank on Thursday 8 April 2021, 17:00-18:30. You can see a video of the event here.

by Andrew G. Haldane, Bank of England.

Central banking came of age in the 20th century. At its start, the world had only 18 central banks (Chart 1).  Most did not have a well-defined statutory, much less independent, role in setting monetary and financial stability policies. They existed, by and large, as an operational agent of government. By the end of the 20th century, the world had around 200 central banks, pretty much one for each nation state.  The fraction of them with operational independence for the setting of policy had risen to 80-90% (Chart 2). Central banks and their independence had become an international norm in the space of a century.

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Central Bank Independence and Price Stability

This article was initially prepared as the author’s introductory remarks to the Nicolai Rygg 2021 virtual panel debate on Central Bank Independence – Lessons from History, hosted by Norges Bank on Thursday 8 April 2021, 17:00-18:30. You can see a video of the event here.

by Harold James, Princeton University.

In the second half of the twentieth century, the arguments advanced in favor of central bank independence have been largely concerned with price stability, combatting inflationary legacies and breaking inflation expectations. These objectives have not always been over-arching social or political priorities. They were actually quite novel, in that discussions of the major functions of central banks had previously rested on either securing the funding of government debt or on maintaining the stability of the financial system.

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The Interwar Period as the Crucible of Central Banking

This article was initially prepared as the author’s introductory remarks to the Nicolai Rygg 2021 virtual panel debate on Central Bank Independence – Lessons from History, hosted by Norges Bank on Thursday 8 April 2021, 17:00-18:30. You can see a video of the event here.

by Barry Eichengreen, University of California Berkeley.

The 1920s and 1930s were a pivotal period in the emergence of modern central banking.  (You would expect me to say that, my having been specialized in researching this era.) 

Before World War I, central banking was a rules-based affair.  Central bankers followed five rules.  First was the golden rule: they were expected to maintain the convertibility of the currency into gold at a fixed price.  This was compatible with a second monetary policy rule: the real bills rule or doctrine.  This dictated providing just as much credit as was required by the legitimate needs of business, but no more.

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The (Pre)History of Central Bank Independence

This article was initially prepared as the author’s introductory remarks to the Nicolai Rygg 2021 virtual panel debate on Central Bank Independence – Lessons from History, hosted by Norges Bank on Thursday 8 April 2021, 17:00-18:30. You can see a video of the event here.

by Stefano Ugolini, University of Toulouse.

In book IV, chapter 4 of his treatise On Money (1751), economist Ferdinando Galiani (1728-1787) explained why the regulation of paper money by the Neapolitan banks of issue had proved so extraordinarily stable: “The credit of our banks has been maintained […] because the Court has behaved almost as though it were not even aware of their existence. Their management is in the hands of the most honest individuals who, in properly regarding the care of the public welfare as a pious and devout work, have demonstrated a total and, I should say, almost miraculous disinterest. Money deposited in them is kept religiously. And although the resulting immobility is harmful, failure of the banks would be even more harmful”. In writing these words, Galiani was directly taking aim at Charles de Montesquieu (1689-1755), who in The Spirit of the Laws (1748), book XX, chapter 10, had argued that a sound issuance of paper money could never take place in an absolutist monarchy. In Galiani’s view, even in an absolutist monarchy (as the Kingdom of Naples actually used to be) money could be safely issued if its management was delegated to independent, “conservative” bankers – although their conservative bias might have prevented them from acting proactively enough. It seems legitimate to say that Galiani’s quote already encapsulates, in a nutshell, the core of the subsequent debates about the benefits and costs of central bank independence.

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Statens konsernkontoordning – alt du ønsker å vite, men ikke våger å spørre om

Mats Bay Fevolden og Petter Nordal, avdeling for finansiell stabilitet, Norges Bank

Staten har sine penger plassert på konto i Norges Bank, men bruker private banker til å sende og motta betalinger. Denne ordningen kalles statens konsernkontoordning. Dette blogginnlegget beskriver hovedtrekkene i statens konsernkontoordning og de viktigste tiltakene som er gjort for å forbedre sentrale egenskaper ved løsningen.

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Mot en ny bonanza på norsk sokkel?

av Bjørn E. Naug og Pål Winje, pengepolitisk avdeling, Norges Bank.

Oljeprisen og den europeiske gassprisen falt mye i fjor vår for så å øke kraftig gjennom høsten og inn i 2021. Forløpet for prisene kan i stor grad ses i sammenheng med utviklingen i koronapandemien, men andre forhold har også har spilt inn. Oljeprisen er nå på om lag samme nivå som før pandemien, mens gassprisen i Europa er vesentlig høyere enn i januar i fjor.

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Økonomiske utslag under pandemien

av Einar W. Nordbø, avdeling for pengepolitikk, Norges Bank.

Redusert forbruk som en følge av spredningen av koronaviruset og tiltakene for å stoppe det, bidro til det største BNP-fallet i etterkrigstiden i mange i land i 2020. På den annen side har temperaturen i mange boligmarkeder holdt seg godt oppe, investeringene har ikke falt så mye som man kunne frykte, og i flere land har den målte økningen i arbeidsledigheten vært relativt beskjeden. Land som har klart å begrense smittespredningen, synes å ha klart seg noe bedre økonomisk, men det er store forskjeller.

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Estimating Hysteresis Effects in Norway

by Francesco Furlanetto, Ørjan Robstad and Pål Ulvedal, Monetary Policy Department, Norges Bank.

Will the current COVID-19 crisis have a long-run impact on the level of output and employment through hysteresis effects? Although the current recession is unusual in many dimensions, looking at experiences from the past can be useful to better understand the long-run effects of recessions. We do this in a simple empirical model where we allow fluctuations in aggregate demand to have long-run effects on output and employment. These demand shocks are found to be quantitatively important in Norway, but only if the banking crisis at the end of the 1980s and beginning of the 1990s is included in the sample. Large demand-driven recessions lead to persistent declines in employment, investment and output but leave labor productivity largely unaffected.

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Treghet i forventningene: En enhetlig forklaring på avvik mellom teori og data i obligasjons- og valutamarkedene

Av Eleonora Granziera, avdeling for pengepolitikk, Norges Bank og Markus Sihvonen, Bank of Finland.

Høye kortsiktige renter tilsier en styrking av den nasjonale valutaen og lavere meravkastning på obligasjoner med lang løpetid. Dette står i motstrid til to teorier fra læreboka som beskriver forholdet mellom obligasjonsrenter og valutakurs: Udekket renteparitet og renteforventningshypotesen. Vi finner at begge teoriene kan være konsistente med empirien dersom man forutsetter at de økonomiske aktørene har en treghet i sine forventninger om den kortsiktige renteutviklingen. Denne forutsetningen har stor betydning for hvordan pengepolitikk kan påvirke valutakurs og forventet avkastning.

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