The Institutional Design of Central Banks Open Access

Ainsley, Caitlin Thomas (2016)

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In three essays, this dissertation analyzes how the institutional design of central banks affects policymaking strategies and economic performance. Each essay focuses on a different aspect of monetary institutions and considers both theoretically and empirically its implications for monetary policymaking. Of central interest throughout is the role played by policymaking uncertainty and how it factors into the decision-making strategies of governments, central banks, and private markets. In the first essay, I consider how policymaking uncertainty affects central bank decision-making and, in turn, governments' central bank appointments. Uncertainty - and critically changes in uncertainty during the long terms of appointment which have become a landmark of central bank independence - can result in the appointment of central bankers likely to pursue excessively inflation tolerant strategies. I provide evidence of this relationship with a novel dataset collected from the central bank of Hungary. The second essay explores how central bank voting transparency affects market expectations. I propose and test a theory which suggests individually attributing votes undermines both the accuracy of market expectations and central banks' ability to influence expectations with official announcements. Support for this claim is provided in an analysis of data from the Central Bank of Brazil, where since the release of attributed voting records, market expectations are less accurate and react less to official central bank communication. Finally, in the third essay I examine how the definition of inflation targets affects decision-making and propose they are a potential solution to the problem of policy drift associated with delegation to independent agencies. When an inflation target is defined according to a target zone rather than target rate, I argue the degree of policy drift and deviation from target should be smaller. I demonstrate evidence of this result in a sample of six inflation targeting central banks, including the Czech Republic, Hungary, Poland, South Korea, Sweden, and the United Kingdom.

Table of Contents

1 Central Bank Appointments and Decision-Making Under Uncertainty. 1

1.1 Introduction. 2

1.2 Theory of Monetary Delegation. 5

1.2.1 Structure of the Model. 12

1.2.2 Equilibrium. 14

1.3 Theoretical Implications. 19

1.4 Empirical Analysis. 22

1.4.1 Data. 24

1.4.2 Measuring Monetary Uncertainty. 26

1.4.3 Estimation of Central Bank Preferences. 29

1.4.4 Monetary Uncertainty and Central Bank Appointments. 34

1.5 Conclusion. 36

2 Central Bank Transparency and the Performance of Market Expectations. 38

2.1 Introduction. 39

2.2 Transparency, Accountability, and Market Expectations. 41

2.2.1 Empirical Implications. 45

2.3 The Data. 48

2.3.1 Measurement of Market Expectations. 50

2.4 Analysis and Findings. 53

2.4.1 Time Series Intervention Analyses. 56

2.4.2 Target Rate Updates. 59

2.4.3 Ination Expectations Series. 62

2.4.4 Robustness Checks. 64

2.5 Conclusion. 67

3 Inflation Targeting Regimes and the Implications for Monetary Policymaking. 70

3.1 Introduction. 71

3.2 Delegation, Inflation Targeting, and Constrained Discretion. 72

3.3 Empirical Analysis. 83

3.3.1 The Data. 84

3.3.2 Results. 91

3.4 Conclusion. 100

Bibliography. 102

A Appendix to Central Bank Appointments. 116

A.1 Theoretical Appendix. 116

A.2 Empirical Appendix. 120

B Appendix to Central Bank Transparency. 123

B.1 Empirical Appendix. 123

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