After the Financial Crisis
Edited by Sylvester Eijffinger and Donato Masciandaro
Chapter 7: Institutional Structure and Effectiveness of Central Banks during the Financial Crisis: An Empirical Analysis
Yiwei Fang, Iftekhar Hasan and Loretta J. Mester1 Introduction A central bank is crucial for the functioning of any economy, since it is responsible for setting the country’s monetary policy in order to achieve long-run price stability, sustainable economic growth, and a stable financial system. Given a central bank’s importance, there is a large literature in economics examining how various central bank characteristics could influence the effectiveness of monetary policy. For example, the literature discusses the legal and institutional frameworks governing central banks throughout the world. Nowadays, it is widely accepted that central bank independence, accountability, and transparency are associated with more effective monetary policy and better economic outcomes (e.g., Grilli, et al., 1991; Cukierman, et al., 1992; Berger, et al., 2001; Eijffinger and Geraats, 2006; Hayo and Voigt, 2008). More recently, some attention has turned to the internal governance mechanisms of central banks (Lybek and Morris, 2004; Frisell, et al. 2007; Hasan and Mester, 2008). In light of some of the corporate governance literature, these studies argue that features of the governing body of the central bank, such as delegated boards of directors and the design of the optimal 1 The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Philadelphia, the Board of Governors of the Federal Reserve System, or the Bank of Finland. 180 Institutional Structure and Effectiveness of Central Banks 181 contract for bank supervisory tasks, are essential to achieving its objectives effectively...
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