Three essays on central banking and credibility
|Author:||Mgr. Tomáš Holub, PhD.|
|Year:||2001 - winter|
|Leaders:|| doc. Ing. Tomáš Cahlík CSc.
|Work type:|| Dissertations
|Awards and prizes:||Olga Radzyner Award, Oesterreichische National bank, Ministry of Education Award ( 2002 )|
|Abstract:|| This dissertation contains three essays related to the modern trends in central banking and its credibility. The first essay focuses on the political-economy aspects of the inflationary bias, arguing in favour of preserving a high degree of monetary policy independence. The second essay discusses what factors should influence the choice between a floating exchange rate and adopting a fixed exchange rate as simple policy rule, trying to import credibility and monetary stability from abroad. The last essay discusses some aspects of the central bank's financial independence and its inter-relationships with credibility.
A Swing-Voter Model of the Inflationary Bias
A theory of the inflationary bias of a politically motivated central bank is presented. In contrast to the traditional literature, the behaviour of policy makers is derived as an election strategy in a probabilistic-voting model, assuming that the policymakers have no own preferences over inflation and output. The election process is viewed as a conflict between the employed, unemployed and entrepreneurs. The derived equilibrium policy minimises the loss function of an "average" individual, a point that the traditional literature took for granted. The model also shows that if the unions are strong enough to maximise the expected utility of their members, an inflationary bias arises unambiguously.
Importing Low Inflation via Pegged Exchange Rates, Currency Boards and Monetary Unions
The standard Obstfeld model of self-fulfilling currency crises is used to explain why the current consensus favours polar exchange rate regimes: either floating or the "hard pegs". An extended version of the model is also presented, which shows that "a hard peg" is more advantageous for a country if its credibility deficit is high, the variability of supply-side shocks is low and the correlation of these shocks with the reference currency area is high. Finally, the model analysis is used to argue with the recommendations of some economist that the CEE countries should adopt currency boards to import credibility. For the Czech Republic it is argued that it would not be wise to speed up its monetary integration with the EU artificially, but at the same time there are no strong reasons to artificially postpone the official EMU accession.
Seigniorage, Central Bank's Profits, Capital and Credibility
The first part of this essay discusses the alternative definitions of seigniorage, arguing in favour of the traditional ones and criticising the broad, cash-flow based concepts of seignorage that occurred in the economic literature during the 1990s. The next part of the essay thus focuses on one of the traditional definitions, the"opportunity cost seigniorage". The link between this definition of seigniorage and the central bank's profits is studied in detail. This analysis also reveals the other factors that influence the central bank`s profits, including the risk premium in foreign exchange markets, which has a link to the credibility of the country's authorities. The theoretical findings are applied to the accounts of the CNB, showing their empirical relevance for the Czech case. Finally, the last part of this essay focuses on the question of "capital adequacy" for central banks and the particular situation of the CNB in this respect.
Keywords: inflation, monetary policy, central banking, credibility, dynamic inconsistency, new political economics, currency crises, currency boards, monetary unions, optimum currency areas, seigniorage, risk premium
JEL Classification: D72, D78, E31, E32, E42, E52, E58, F15, F33
|Downloadable:|| Dissertation Thesis - Holub