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\TOLKSWIRTSCHAFTLICHFTAGUNG 1997 DER OF:si'ERREIcHIscHEN

NATIONALBANK

Die. bedeutung

der Unabhängigkeit der Notenbank

für die Glaubwürdigkeit

der europäischen Geldpolitik

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2.Vo1KswIRTsci-IAFTLJcHE

TAGUNG 1997

AM

13. UNI) 14. MAI 1997 IN WIEN

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L\ tiAL

V1Ks\vI' ri 1(U1 I(,uN( 1 997

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Tagungseröflnung und Einleitung Ai I-X.ANI)lkI 1 AM) .l tI

The European Central Bank: Independent and Accountahle

M.I•RFu

1

.M.

Central Bank Iridependence and Price Stability (‚ )R(; \\"I NCK II R

Komnwntar zu: Central Bank lndependenceancl Pri Stability

5JAN).) \

Central Bank lndcpcndencc and Monetary Policv in a Low Inflation Environment

Ir)RRI I t

Central Bank Statutcs thc 1 listori(-al l)imcnsion

\l \RI Ii \NI)R] All

Cornnwnt 011: Central Bank Statutes the Historical Dimension

(tI (JJ \J)I

Central Bank Statutes - the Future

l 111

Comment on: Central Bank Statutes the Future K i ti Is 1 ii Rs( 1 i 1 R

1 )ie Beckutung der Unabhängigkeit t.ir die Oe.sterreichischc Nationalbank

iiJl)( >ii 1 m Kamingespräch

5'i 1 \ i.ii R 1 \V. l i J•i-I.l I

('entra] Bank Inckpcn(lcnce in Practicc an International Comparisori Rit.j R., )\J III

Comment on: Central Bank lndependcncc in Practice - an International Comparison 1 Ii N Ri ini 1 >14•ts1

Comment on: Central Bank Independence in l'ractice - an International Comparison

:\1 IX (:1K!) lk\1\N

Central Bank Indeperidence. Grovth aml Empinvment 1 li 1 \l Jr 1 RIs( II

Conment on: Central Bank Independence. Gius iii and Finploymt'nt I tii .s1-i cl II) Me q IN \

Comment on: Central Bank lndepenrknce, Growth and Employment Podiumsdiskussion

J()H\NN 1-ARNI i.Il'NIR (1'IIARI i '. \. L (ioilIi.Itr E.w.ru i" )\V(Y1'NY

I:IN,i \Vi 1 II KE

Notenbankunahhängigkeit und Demokratie

Resümec und Schlußwort A. Ii. \L\\iii INK

Statutorv ln(k'penck'nce Essent al tor ('entral Ranks, hut the Proofofthc Pudding is in the Eating 1)ie Vortragenden

4

10

30

36

42

6?

72 78 90

98 122

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\UIKSWIRr.\(1IAI-T litIIE 1A(UNG 1997 3

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AI)OLF WALA

GENERAIII1uKToR 1) FR

0 FST E R RE ICH ISC H E N NATIONALBANK

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C.)NB

Tagungs - eröffnung

und

Einleitung

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\i i t. \\ \

Sehr geehrte Damen und Herren!

Ich darf Sie alle auf Herzlichste zur 25. Volkswirtschaftlichen Tagung der ()esterrcichischcn Nationalbank begrüßen. Laut WWU-l)rehhuch wird ziemlich genau in einem Jahr der Europäische Rat auf Ebene der Staats- und Regierungschefs den TciIrhiiierkreis an der dritten Stufe der WWU festgelegt haben. Unmit telbar nach der Entscheidung des Rates über die ki Inehmer werden 1713 und da' EsZB gegründet.

1 i nt I.in heLitt In Lilhill

Jahr die LZI3 hcretts bestehen durfte. Wir sind überzeugt, (laß die Oesterreichische Nationalbank als Gründungsmitglied vertreten sein wird.

Das Thema der heurigen Volks- wirtschafdiihen lägung ist eng mit dem eingangs Gesagten verbunden.

Eine unabdingbare Voraussetzung für die Teilnahme an der dritten Stuk ist die Vereinbarkeit der Statuten der nationalen Noten - l)anken mit dem Maastricht - Wrtrag.

Ein wesentliches Element dabei ist die rechtliche Unabhängigkeit der nationalen Notenbanken, wol)ei diese Unabhängigkeit manchmal auch als das sechste Konvergenz- kriterium bezeichnet wird. Wie wir wissen und auch dem Bericht des EWI „Fortschritte auf dem Wege zur Konvergenz" entnehmen können, haben die E U - Notenbanken noch Anpassungshedarf. um den \rtrags- bestimmungen zu entsprechen. 1 )ies gilt formal auch für die OeNB,

obwohl diese auf eine langeTradition als unabhängige Institution zurück- blicken kann. Ein weiteres Element betrifft die K )nkretisierung der Hauptaiifabe der Notenbanken: die Aufrechterhaltung der Preisstabili- tät. 1-ür mich etwas überraschend haben wir auch dabei einen Anpassungsbcdarf, da die derzeitige Formulierung laut OcNB-Gcseti offenbar dem Primat der Preis- stabilitat nicht ausreichend ent- spricht. Es ist durchaus argumentier- bar, daß dieser Stahilitätsauftrag zumindest gleich streng wie im FZB- Statutenentwurf ist. Wir gehen davon aus, daß das österreichische Parlament zeitgerecht ein neues, dem Vertrag von Maastricht genü- gendes Notenhankgescti verabschie-

(lCfl wird.

1-her wie anderswo führt die parlamentarische BeI'assung mit Notenhankangelegenheiten zu einer Hinterfragung ihrer Aufgaben, ihrer Position in der Gesellschaft, ihrer Legitirnierung und insI)esondere auch des materiellen Gehalts ihrer unabhängigkeit. Wir lesen von

„Zcnt ralbankismus", „undemokrati - seher N ehenregierung", mangelnder Rücksichtnahme auf andere Ziele der Wirtschaftspolitik, usw. Es wird unterstellt, daß die Unabhängigkeit der nationalen Notenbanken ihren Leitungsgremicn zu viel Macht und Einfluß gäbe. Die OeNB teilt diese Meinung nicht. I)ie Leit ungs- gremien der OcNB Sind dem Gesetz und der Bevölkerung voll verantwortlich. Aus dieser Sicht ist auch die Podiumsdiskussion zum Thema „Notcnhankunabhängigkeit und Demokratie" ganz besonders relevant.

In der EZB werden die Vertreter der nationalen Notenbanken nach dem Prinzip „ein Land - eine Stimme" vertreten sein. Dies ist psychologisch für ein kleines Land wie Osterreich besonders wichtig.

6 - VOLKSV1R-L-5CHAFTLICI1E TÄGUNG 1997

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\i.oii- \t\tLA

Zur Erfüllung ihrer statutenmäßigen Aufgaben ist es jedoch notwendig, daß sich die Repräsentanten in den EZB-Gremien nicht als nationale Vertreter, sondern als europäische, (leni vorrangigen Ziel der Preis- stabilität verpflichtete Notenbanker sehen. Damit komme ich zu den institutionellen Aufaben der EZB.

[)arauf wird dankenswerterweise Baron Lamfalussv eingehen. Er hat als erster Präsident des EWI in den vergangenen Jahren Pionierarbeit geleistet. Kein anderer ist mehr befhigt, über die Konsequenzen des Maastricht - Vertrages für die Gestaltung des ESZB zu sprechen.

Gelegentlich wird befürchtet - audi bei uns in Osterrcich ‚ daß sich die EZB, die noch keine eigene Glaubwürdigkeit aufbauen konnte, zumindest anfngs genötigt sehen könnte, eine zu restriktive Wäh- rungspolitik zu verfolgen. Zudem Sei das Ziel der Preisstabilität, mit einer Inflationsrate von zuletzt rund 2% im EU-Durchschnitt, prak- tisch erreicht. Zusätzliche Anstren- gungen zur weiteren Reduzierung des Preisauftriebs wären nicht nur nicht mehr nötig, sondern könnten sogar schädlich sein. 1 )iesc Thematik wird unter andcreni zunächst von Prok'sM r Man Fred Neumann, einem der anerkanntesten deutschen Oko- nomen und \rsitzenden des wissen- schaftlichen Beirats des Bundes- ministeriums für Wirtschaft, auf- gegrifhn. Er wird im folgenden die theoretischen Grund lagen über den Zusammenhang zwischen Noten- han kunabhängigkeit und Preissta- bilität näher darlegen. Während des

Mittagessens wird der stellvertre- tende Generaldirektor des IWE, Professor Stanley Fischer, das Thema

„Central bank independence ancl rnonetarv policy in a bw inflation environmcnt" diskutieren.

Anschließend werden wir uns einerseits mit historischen Frage-

stellungen und andererseits mit der Zukunft befassen. Professor Capic präsentiert ein Papier über die historische Entwicklung von Noten- bankstatuten am Beispiel der Bank of England, des Federal Reserve un(l der Ncw Zealand Reserve Bank, während Direktor Quaden von der Belgischen Notenbank seinen Vor- trag der Zukunft der Notenbank- statuten mi Rahmen dcs ESZB widmen wird. Präsident L.iebscher wird das Thema aus österreichischer Sicht beleuchten.

Meine I)anien und Ilerren Wie ich bereits sagte, blickt die OeNB auf eine lange Iradition der Unabhängigk&i zurück. I)ies war unbe stritten (1er ausdrück- liche Wunsch (leS G&

setzgehers. L)ie Er folgsgeschichte dti-

osterreichischen \Virtsc hai 1. LII

Währungspolitik eine stabile Währung, ausgeglichenes Wirt- schaftswachstum, relativ geringe Arbeitslosigkeit, hohe Real lohn - flexihilitat unterstützt durch (las international anerkannte öster- reichische System der Sozialpar t - nerschaft sowie insgesamt stabile politische Rahmenbedingungen sind soh 1 der überzeugendste Beweis Für (1k Richtigkeit dieser Entscheidung des Gesetzgebers.

l)as System der österreichischen Sozialpartnersehaft, nämlich (lic Einbeziehung sozialpartnerschaft- licher Institutionen - über ihre Stellung als Mitglieder des Gene- rairats der OeNB— in den währungs- 1)01 itischen Entschcidungsprozeß, wird auch kritisch gesehen. l)em möchte ich entschieden entgegen - halten, (laß (liese Einbindung (lie Akzeptanz unserer stabilitätsorien- tierten Währungspolitik wesentlich erhöht und damit die Kosten (1er 1)isinllation gesenkt hat.

\jKswJ -rscuAI-TI.Icu IAt;tlN; 1997 e91

x111

7

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1 }( 1)1 1 1

Die Übertragung der Unab- hängigkeit an die Notenbank durch die Regierung ist gewiß kein selbst loses Unterfangen. Empirische Untersuchungen zeigen, daß unab- hängige Notenbanken hei der Sicherung der lreisstabi1ität bzw.

der Bekämpfung der Inflation im allgemeinen erfolgreicher sind als weisungsgebunde lnstitutionerL I)ies gilt zumin(lest in den Industrie- staaten. Letztlich wird (1er Erfolg der Wirtschaftspolitik aber nicht

;ra(I hr Preisstabilität, son- hrn an der optimalen I'rfiillung der Ziele »im magischen Vieleck"

messen: Preisstabili- tät, gepaart mit Wirt- schaft.swachstum, ho- her Beschäftigung, aus-

&glichener Leistungs- bilanz, gesunden Staats- finanzen, SOWIe Ufl(l

(Id hci uns in Osterreich einen hohen Stellenwert - „akzcptablcr"

Einkommensverteilung, sollen mög- lichst gleichzeitig erreicht werden Diese Ziele der Währungspolitik allein aufzubürden, wäre verfehlt und kontraprod uktiv. Der Zusam - menhang zwischen Notenbankun - abhängigkeit, Wachstum und 1k- schaftigung ist allerdings äußerst vielschichtig und empirisch schwer zu fassen. Diese Aufgabe hat Pro- fessor Cukicrman, Verfasser meh- rerer hahnbrc'chender Arbeiten zu unserem Thema, übernommen.

Dabei erscheint mir insbesondere auch eine Diskussion über die Frage der Akzeptanz von Notenbank- unabhängigkeit bei hoher Arbeits- losigkeit wünschenswert.

Professor Eijifinger, der an meh- reren Universitäten lehrt, wird die Unabhängigkeit von Notenbanken im internationalen Vergleich beur- teilen. Ich möchte seinem Referat natürlich in keiner Weise vorgreifen, aber meines Wissens schneidet die

Ocsterreichische Nationalbank in solchen internationalen Vergleichen traditionell sehr gut ah.

Unabhängigkeit (ler Zentralbank bedeutet begrifflich eine bestimmte, abgegrenzte Selbständigkeit, insbe- sondere gegenüber der staatlichen Verwaltung. Ich möchte jedoch betonen, daß Unabhängigkeit in dem Sinne, daß eine Notenbank gänzlich außerhalb staatlicher Emil ußnahni e steht, sozusagen einen „Staat im Staate" bildet, im System eines parla- mentarisch-demokratischen Rechts - staates natürlich undenkbar ist. Die grundlegende Organisation und die Befugnisse der Notenbank iiüssen auf den Entscheidungen des ckmo- kratisch legitimierten Gesetzgebers basieren.

Sehr geehrte L)amen und Herren! Ich freue mich, daß so viele anerkannte Experten unserer Ein- ladung nach Wien gefolgt sind.

Gemeinsam wollen wir versuchen, durch fundierte und sachliche Information, clureh Beleuchtung des Themas aus verschiedensten Blick- winkeln, ein entsprechendes Be- wußtsein für die Bedeutung einer unabhängigen Notenbank zu schaf- kn und so einen konstruktiven Beitrag zur lauh.nden 1)iskussion zu liefern. Ich blicke den kommenden zwei Tagen mit großer Erwartung entgegen und wünsche uns allen angeregte und offene Diskussionen und insgesamt viele neue Einsichten in dieses interessanteThema.

Vu1KswmwrscHAvrLmcm-mI. TAGuNG 1997

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- - -

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ALEXANDRE LAMFALUSSY PREsIIENT

EUROPEAN M0NETARY IN ST 1 TUTE

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C')7vIB

The European Central Bank:

Independent and Accountable

Against a hackground of both historical cxpericncc ancl the evolu- tion oF the policv debate, central bank indcpcndcncc has in man)' countries hecome the pref'crred means of providing an institutional framework tor monctary policy.

Reilccting this growing ConsCnUs, the Maastricht Treaty enshrines the independent status of the Furopean Central Bank (IiCB) and thc EU national central banks -- which togethcr Form the [uropean System of Centra! Banks (ES(-'B) as a buiwark for ensuring that the future euro arca hcncfits from price stability. However, it must he conceded that ciespite the fact that the legal arrangements which havc heen made in this regard tor the ESCB are clearly spelled out in the

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Maastricht Treaty, claritv does not always prevail concerning the scope of such independence. lt is against this background that 1 wcicome this opportunitv to clarify the basic issues of 'cntral bank independence, both as 1 see thern and as thev are in- corporatecl in thcTreatv.

1 would like to organise mv speech in two parts. First, 1 shall take a hack ward-looki og perspectivc hy brieliv dcscrihing die main argu- ments underiving the general move u vin Is the establishment oF mdc-

pendent central banks vith a mandate for price stabilitv. Since l assume that \OU are quite familiar with the arguments, 1 will not go

1040 much detail.

Second, 1 shall take a cioser look at thcTreaty arrangements relating

lu thu iiulcpcndcnce afl(l account- ahilitv ol the future ECB. This in

dudes the preparations w hich are currently un(kr wav to cnsurc that national central hanks ol' Memher States compiv vith die relevant Treaty obtigations.

The move towards central bank independence

Over die past decades, two signi- ficant changes have taken place in die approach tu monetary policy- niaking, with important conse - quences for the wav the institutional arrangements for die Future ESCB were dcsigncd. One relates to the adoption of price stahilitv as die primary goal oFmonctary policv, and the other to die mandate wkiely given tu central banks to pursuc this ohjectis'e independent of political interfcrcncc.

The first element of this sca- change was prol)ahly triggered bv die negative experience of die 1970s, when inflation and unernplovment

rose in parallel, despite die el'forts ol macroeconomic pol icy makers tu generate renewed growth in die traditional "Kevnesian" manner. liiis led to gro\ving rccognition of the fact that in die long term mnonetary policv can on ly systenlati call control die price level anti not real ec000mic variables such as out- put grovth or uncniplovnicnt.

Adrnittedlv, over shorter horizons, monetarv policv does indecd afflct hoth real anti nominal variablcs.

l-iowcver, it is hv now wideiv accept- cd among policv-makcrs and in die academic literature, that deliberate attempts to exploit any short-run tradc-offs between output and prices are likeiv tu resuk in a permanent Iv higher and more variable rate of in- flation, with significant advcrsc con - sequences for rcsource al location, long- run output and productiv itv growth. Against this background, the primarv goal 0! monetar) policy should lx' to achievc and rnaintain price stability, with any other ecu- nolnic objectives recciving cmphasis only to the cxtent that price stahilitv is not endaugered.

The second fundamental change which 1 woukl like tu highlight is die widcsprcad teiidcncy to delegate the decision-making powcr over monctarv policv to indcpencknt central banks. Modern economic thcorv ernphasises the inflationary hias in econoniic po!icv, which re- lates in particular to die so-called time-inconsistcncv issue i.e. the problem of ccrn incing the public that the monctarv authorities will resist the tcrnptation tu stimulate output growth in the short run hy creating "surprisc inflation". Against the hackdrop of negative past ex- perience, the 1ulilic' is tmlikely to have much faith in thc authorities' prornises tu mnaintain low inflation.

Unless these pI-omiscs are under- pinncd liv a c'rctlible form ol'

12 - VOLKSWIRTSCHAFTLICHE 11GUNG 1997

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pre-commitrnent, the equilihriurn inflation rate will he higher than nceded, with no bettet performance in terms of output and possihiv even a deterioration. As a solution to this prol)lem, it has been suggested that responsihi lity lor monetary policy he sel)arate(i Urom political control and tu cnshrine this in legisiation.

According to this view, centrai hanks shouhl be given the freedom tu lormulat e and cxccutc monetary

j)OlkV in lilie with their primarv ohjective as deterrnincd by the legis- lator, tu w'hom they are accountabk.

Accountabilitv mav involve ei ther legal obligation for the centi-aI bank to give reckoning For the conduct ol monetary policv or a commitment t() cxplain its actions, for example, in regular reports and tu Parliamcnt This aliows central banks to take mcci jurn-terin orientation and not to be distracted bv short-term polit al motives, an approach which benciits the crechhilitv, transparcncy arid ciriciencv ol monctary poliev.

In line with the foregoing ana- lvsis, more and more EU central hanks havc over time heen assigned the task of gua ra ntecing price stabil - ity, cither cxpliuitiv hv national law, or more infiirmally as a refleetion ui an underlying culture of stabilitv. In niany cases, these rcforrns went hand in hand with the move towards a greater degree ui central bank indcpendence. These changes in national rnonctary legislation or at least the practice of central bank independence wcrc heginning tu be im1)1eIflcfltcd weil before the start of the Maastricht press Tliev were, however, further prornoted ii) the rccomrnendations of the l)eiors Committee with regarci to the insti- tut ional arrangements for Stage Three of Morietarv Union. The Committee's proposals culrninated in the iriclusion in the Maastricht Treaty and thc Statute of the ESCB of

the prirnarv objective of price stahilit-, the pursuit of which is delcgated t() an independent central bank system composed of the ECB and thc national central banks of Member States.

The Independence and accountability of the ESCB

The Treaty (Article 107) and the Statutc of the ESCR (Articic 7) hoth contain very cicar provision.s regard- ing the rclationship with third par- ties, 'hich Ica' Pl \vhat-

soev(r hi 11Ii'iJi1 - 1)l1atiU11. Fo cj uot a kv setejit: "nither ih ECI3, nor a ;iational central bank, nur any member ui thcir ciecision- making hodies shali seek or take in- structions from Coniniunitv institu- tions or budies, frum anv govern- nient ofa Meniher State or froni an',' other body". Moreover, the afore- rnentioned authorities shal 1 also and 1 quote again "undertake tu respeet this principle and not tu suck to iniluence the members of the decision_making hodies of the ECH or of the national centrai banks in the performancc of their tasks". Tu put lt simply: the nioor tu the single mone- tarv polk'v is locked Irom both sides, amd neither the ESCB mir third parties can open the door For poiiti - cal instructions. Evcn attenipts tu du so wuuld alreadv be in conflict with the provisions of the Treaty and the Statute ofthc 1:SCI3.

For national central hanks tu become an intcgral part ol the ESC'B, Meniber States have to ensure that

VOLKSWIKTSCHAI-IIICHI• TAGUNG 1997 (I)NB 13

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national legislation is compatihle with the Treaty (Artick 108) and the Statute of the ESCB (Artide 14).

This obligation of legal convergence docs not require the t'tilI harmoni- sation of central bank statutes, hut merclv insists that inconsistendes with the Treatv l)e eliminated in respeet of katures such as institu- tional, 1)crsonal, functional and Ii- nancial independencẹ This rcc1uire- ment applies to all Memher States, inc!uding those which mav initialiv he unable tn in in_l -ur-

itfl(\ U\\ ifl " t() IUSUIIiLICflt riolnic nvergencẹ LXtj)tiOIlS are l)enniark and the Unite 1 Kingdnm, vhich enjov the right ol "opt in" or

"opt nut" of EMIL Memher States have made signiflcant progress in re- cent vears in amending their ccntral bank statutes whcre nceded in order to fulfil their Treatv obligations. For example, major reforms have taken l)lace in Belgiurn, Spain, France, Luxembourg and Portugal, whilst in Germanv, the Ncthcrlands and Finlaiid changes in kgislation are pending. For thosc intcrestcd in further details, l would refer vou to thc FMl's November 1996 rcport entitled "Progress towards conver- gene 1 996", %vhich contains a de- tailed account tor each countrv aU the provisions which would nccd to be adapted.

The importance ui these institu- tional arrangements kr creating an appropriate monetary 1,olkv setting in Stage Threc of EMIl cannot be underestimated. 1 would like to

illustrate this hy reference to the following two arguments. First, these arrangements underl ine die continuitv with the experience of the EU central hanks vith thc most successful track rccord in terms of prke stability over the past decades.

In fact, in legal tcrms the ECB will enjov an even higher Kgree nt independence than the most mdc- pendent national central bank at present. Morcover, these legal ar- rangements are lirmIN7 anchorcd in the MaastrichtTrcatv and could thus nnly he changed hv aTrcat rcvkion.

.-\s vau know, this is a vers difh..ult .i r id tiflic -consuming proccdu re, nvolving hoth the European Parlia- ment and all the national parlia_

inents, which thus ensures that such

.1 step is not lightiv takcn.This brings nie to the second point, namelv that iiiitially the ECB will have na track record o its own, other than the average track record that it may inherit froni the participating national central hanks. This implies that financial markets and the general public will assess thc per! ormarice of thc ECB on the basis ot the ctkctivcncss of the monetarv n 1 ky tamework aclopte 1 and the ahilitv to act in accordancc with its prirnarv ohjcctivc.

Taken togethcr, these two argu- nients make it dear that thc indepen dcnce aU the ESUB underpins the crelibility arid eilectiveness nt the single monetarv policv and is thus a key condition tor the rnaintcnance of lrice stabilitv in the euro areạ Given this legal framework, the Governing Council of the ECI3 will he abk to decidc on the basis of its own judgc- ment on the scope and timing of monetary policy actions and how thcv should be executed. Naturally, in its assessmcnt the Governing ('nundl will take account (>1 a '.vkk range of relevant factors - including the state nt die econorny in the

14 €?)7B VOt.KSW!Rrs(I-I-'.ErỊl(IIr 1ẶtING 19q7

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\il\:\Nll1\\1tI

Monetarv Union - hut oniv to the extent that thev afkct Future price (lcvelopments. This docs not iniply, as is sometimes suggested, that the secondary objectivc Of pr( )V Id Ing support tu the general economic policies in the Communit y has no real mcaning. Nevertheless, under its nlan(late the ESCB can oniv pursue this additional goal provided lt cloes not prejudice the primarv objective ot prkc stabilitv.

A natural complement to the indepen(Ient status oF the ESCH are thc Trcaty provisions which make the ECB accountahlc for its polic act ions Accountabi 1 ity is reflected ahove all in the lact that the President and the other nienihers ol tli l:xecutive Board of the ECB, at thti own initiative or on rcquest, mav hearcl by die conipetent comnhittecs of thc Europcan Parliament (Articic 109 Ii 3). A further aspect of aecount- abilitv concerns the rec1uircment tu puhlish an annual report covcring the single monctar\ polic\ anl other activities ofthc ESCB.The Presklent of the ECB presents this annual report tu the Coundl and the Euro- pcan F'arliamcnt, whk»h on that basis could subsequentiv hold a general (lebate. Reports on the activitics uI the ESCH will also iw puhlished (luring the ycar, at least quarterlv, in addition to weekly tnancial state- ments All these provisions to which 1 rnay add the wish tu deliver speeches to the public and state- ments to the prcss clearly promote the transparencv of monetarv 1)olicy objcctives, intentions and a-tions.

They therehv support the effec- tivefless ot monetarv polic. At tEe same time, thcTreatv recognises that tEe ECB cannot he made responsihk For outcomcs in terms ol inflation month-bv -inonih, since tEere are lags involvcd hetween a change in tEe course of monetary polk'y an(l its efkct on prices. Moreover, in thc

.short term, the inflation outcome may reflect the incidence of tempo- rar' or external factors over which the ECB has no control.

At this point, critical observers often confront mc with tEe fact that the door is not completely shut against political interference, as the Treatv mav scem tu rnakc an excep- tion to tEe independence of the ESCR with regard to tEe exchangc rate policy of thc euro area. The EC( ) El N Council inav i n& ll t n -

hid Iortnjl (\(h1r1» 1,11v

11.11 1111' '\ IIII . oUIlIie ‚'1ll'ItIv ihv

EU, or formulate general orit'n- tations for exchangc rate policy in relation tu the currencies ol' these non-EU countries. 'Fhis essentially refleets tEe current situation in most Member States, where the govern- ment deterrnincs tEe exchange rate rules (ii' any) and tEe central bank is responsihle for the cxecution ot this policy. On closer inspection, however, 1 (10 not Fear a Potential overburdening of tEe single monc- tary policy via this route.

'Ib hegin with, the participation oFthe euro in a multinational system with non-EU currcncics is, to say the least, not on the agenda.You may or niay not like it, hut 1 do not sec the likelv cmergence ola BrettonWoods Mark II in the freseeahle Future - and hv this 1 do not reFer to just a

COU1)IC of years. And as regards tEe

"general orientations For exchange rate policy", while such orientations arc indeed in tEe hands of the ECO1'IN Council, thcy can be issucd

Vot.KswIR'rsc'FIAFrr..IcI-Il-. 'EAGUN(, 1997

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only cither on a recommendation from the ECI3 or on a reconimenda- tion f'rom the Commission hut af- ter consulting the ECI3. And Article 109 of the Freatv savs cxplidtk that

"these general orientations shall be without prejudicc to the primary objcctive of tue ESCH to rnaintain price stahilitv".

Overall, lt appears that sulTkient

"checks and balances" have heen huilt into thc procedurc. 1 am conliclent that the view ot the ECI3 in these exchangc:' ters v II iirv a

\ r hih iliti11,1 and t11,11 th indpcndcncc ut tAiv I:CB III not be allectcd. Mv contkience also rinds support in the fact that the EMI has plaved a crucial rok in hclping to design the new cxchange rate medianism (ERM II) hr establishing links hetween thc euro and thc non-participating EU currencics. To our satisfaction, the arrangement contains an exj)liCit safcguard clause for the ECI3 (and other central hanks) with regard to automatic intervention and financing at the margin, and also assigns a key role to the ECB (and other central hanks) in negotiations that may culminate in realignments.

So far, 1 have mainiv concen- trated an the twa "monetarv an- chors"that should heip to pI-c)vidc lor a stahle single currcncr: the ohjec- üve of price stability and the man- date for an i n(le[)endent monctarv policv. WC all know that other eco- numic policies have an essential sup- porting role ta play in the eflort to

maintain price stahility on a durahle basis. In this respeet, ensuring sound and sustainahic budgctary positions woulcl ccrtainlv make thc ESCB's task a lot easier. Fortunatelv, a series of Treatv 1)rovisions support a high dcgree of riscal disciplinc which is of course also vcrv much in the interests of Meniher Statcs them- selves. Alreadv sincc the start of Stage Two, Mcmher States have na longer heen allowed to engage in rnonctary rinancing of budget deil- cits (Article 104). Correspondingly, for Stage Three, lt is explicitiv I>rhiddcn fur the ESCI3 ta suppis

redit 17acilitics to governmcnt 1 )odles, or to huy governnlent dcl instruments in the primary market.

In addition, financial institutioris arc hut alluwcd ta grant crcdit to public ' uthoritics under preferential condi - tiuns(Article 104a). Furthermorc,a hail-out of one Member State with tinancial problems hy another coun- trv is stricttv CXCIUdC(l (Articic

104 b). FinalIv, thc Trcaty ohliges EL! countries participating in the singic currcncy to avoid excessive budget deficits (Article 104 c).

Compliance witli this obligation

%%ill be assessed in the contcxt ol an elahorate proceclurc vhich will ultimateiv lead to the imposition of sanctions if na effective action is taken to correct an excessive deficit.

'Fhe prevennve nature and eflec- tivcness of this procedure has recently been strengthened hv thc adoption of a Stability and Growth Pact, which specifies both the tirne limits for the consecutive steps in the procedure and the sizc of' sanctions. Morcover, lt comnhits cach Member State to target a budgetary position that is dose to balance or in surplus ovcr the me- dium term.

16 VoLKswlRTscII,IrLIc1-1I IÄGUNG 1997

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\i.i•\\ln &! 1 \\1t\l F1

ConcIuson

1 have taken this opportunitv to spell out in dctail how die move to a single currencv in the EU will he acconipanicd by the creation of a new Comrnunity institution, die European System of Central Banks, whosc independent status is guaran- tecd by the provisions of thc Maastricht Trcaty. But 1 niay perhaps condudc by saving that niy conf- dence in the ahility ol' thc Future ESCB to concluct in tu11 indepen- dence a policy gcared towards price stability is not based exelusiveiv on my reacling of thc Maastricht Treaty.

lt is also based on our recent cx- perience. EU central banks have he en pursui ng stabi litv - or i cn ted monetary policies tor quite sonw tinle: otherwise it would havc been impossihle to achicve die clowns'ard convcrgence oF inflation rates within the Community. As you know thc most recent avcragc rate of inflation is just a littk ahove 29,n, If this has l)ccomc possible in Stage Two, with central hanks rctaining their imle- pcndcncc in condueting their OWIi policies, why should this change when they- will act jointiv vithin die frarnework ofthe ESCH?

VOL KswLRTscHAFr1.lcI11 TAGUN; 1997 (9NR 17

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MANFRED J. M. NEUMANN UNIvERsI1ÄT BONN

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Central Bank Independence and

Price Stability

1. Introductlon

These days almost nohociv denies that preserving the internal valuc of monev is and has to he the dominant obcctve of monetarv policv. This is a rarlical change of view Irorn the 1970s whcn it was vide1y held that monetary policv shoulcl aim at achieving several con Ii icti ng objcc- tives, such as stahilizing the price level, stahilizing th external value of the currency and stahilizing the I)usincss cvcic. Famous is the dictum hy then German finance minister Helmut Schmidt, who in 1972 justi- fled inflation iw the statement that an inflation level ot 5 percent was to he preferrecl to an uncmployment rate of 5 percent. \Vhili' lt was weil undcrstood at the tirnc that nione- tarv policy cannot he used to achieve

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several goals simultaneousiv, maiw CCoflüflhistS, not to mention the politkians, still kept firnily to the Keyncsian Phillips-illusion and he- Iicvccl that it was a desirable pclicy prcscription to alwavs take on the one goal that appeared to be the most enclangered onc. Apart frorn the basic truth that printing monev docs not produce output, the problem with such a piecemeal approach is that over the medium to long term the authorities end up with higher inflation than desired hut (10 not

chieve für sure a b

a et-

tcr perfürmancc 01

die real economy. Für an illustration, corn- pare long-run per- tormance of the UK v ith Gcrmany's. Over thc postwar period l3ritish inflation was more than double the (icrman inhiation (6.5 percent on avcragc coniparcd to 2.8 percent), vet l3ritish real per capita growth Fell short of' German growth bv a wide margin (2.0 versus 3.5 per- cent).

Man' ceonomic and social rea- Sons cari he put forward to justil'v that sakguarding the internal valuc of nionev shall he the dominant ohjcctive of monetary ixlicy. lor ex- ample, inflation reduces tEe social productivity of rnonev as a medium of' cxc hange dorninating transactions aml distorts the wcalth-crcating operations of niarkcts by raising transaction costs, by reducing thc information content of prices, by inducing agents to shorten the length of contracts, and by hitting the most bw - income houscholds lacking die expertise to protect t}icmsclves against the inflation- induc'ed rcdistrihutjon of iflCOflie and wcalth. Hut apart from the wel- fare point of vie%% the price stahilitv norm is an ethical tenet to thc liberal

economist. The governmcnt has no right to dcprivc individuals of' their wealth 1w curi-cncv dcbascmcnt.

Given that tEe government vimli- cates the monopuiv of monev pro- duction, it bas tEe moral obligation to provide the citizen with stahic money in exehange for his or her assets.

The question we address todav is what type of monetary constitution

(10 we nccd to make as sure as pos- sible that wc will receive stahle money. And the answer will be: we need to fle the hands otgovernmcnt arl of thc politk'al process with rcs1)ect to the production ()f monev hv providing tEe central bank with a Status of indcpendencc.

II. Price stability by a monetary rule!

The status of central bank indepen- dcnce is a specific way of tving the hands of government. The rules.

versus - author it' (Ichate of tEe earlv (.hicago scl'iool led the monetarists unler the l.cacl of' Milton Friedman (1960) to proposc tving tEe hands of' tEe governmnent's central bank hy a monetary rule - The ciassic proposal is Friednian's k-percent rule. The ruic vould elimninate discrction, cxcept that the central l)ank would hc frec to choose the tcchnk1ues lor monev stock control. Consc- quentiv, the monev stock would grnw in a stablc and prcdictablc tashion, except for implementation c rrors.

In principle, a simple monctarv rule can achieve two highlv desirahk outcomes. First, the problem of permanent inflation can be solved bv setting the parameter k such that the medium-run rate of inflation equals zero. Since the rule would he known to tEe public, inflation cx- pectations wou 1(1 vanish. Second, the rule eliminates major (lestabilizing monetarv fluctuations that central

20 VOLKSWIRTSCHATUCHF: TAGUNG 1997

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.\l.\N FR 1 iij.

M.

\ IUM.\

bankers occasionallv produce in the attcmpt at stabilizing the business cycic. In practice, however, a sinipk rule will Force the economv into permanent inflation er deflatin ii' a major structural change allects the trend rate of Dutput growth and/or the trend rate ei' change of the vclocitv ot fl)OnCV. 01 course, the parameter k can he adjustcd. Iiow- ever, ii' the decision is up to the governrnent er the government - ciependent central l)ankers, we are ba'k t() discretion, and the ruk' will hardlv 1w cre(lihlc. Ii', on the other hand, the rule is written int() a law er, preferal)lv, into tlie constitution ei' the countrv, any arnendn)ent is likeiv te hecorne a hotiv (lehated issue in the political arena, hence vill be vulnerable to the short-lived tides ei political opiflion

lo avoid thc problern eI oppor- tunistic tinkering with the rule, one

WOUI(l necd to design a rule that never necds amendment. Allan Meltzer (1984) has proposed such a ruk. lt would Set the current base nwne growth retrospectively equal to a thrce-ycar moving average ei th' difference hetween the growth rates of output and of the vclocity of money. 11w ruk guarantees „cro inflation in the medium to long terili as it automaticallv adjusts to strutural change. The retrospective characteristic, however, induces sheri-run (hnamics that may he u ndesi rabk.

\Vhatever the merits of specil'ic

fll( )netarv ru les are, the econom ist lias to acknowledge that this prin- cipal solution to the Inflation problem is universallv rejecte(1 hv policyrnakers and politicians. Ap- parentiv, the rigidity of the solution js in tee stark contrast with the trait in human nature of wishing to prescrve the ahilitv to respond flexihiv te unforeseen cvcnts (Neu- n'iann 1992),

III. Essentials for a constitution of independence

As an alternative to monetar)' ruies the status of independence for cen- tral banks can serve as a mechanism ei' hinding the hands oI'government.

Neumann ( 1991 ) intcrprcts central bank independence as an effective precommitment hy the government hecausc the status of independence serves as an external mechanism that binds the hands of currcnt and future govcrnmcnts. The garne- theoi-c ii rnacroecononhic litera- - - ture, in contrast, argues

that governmcnt has ne (levice 1er precommit- inent because anv IflC( h anism cm be chaiigt er he aholisheil hv ti go-vernncrit any tiflit (Persson and Tat'1 Ii n 199). Rut, in Fact, th

political costs of doii ii.a\ k prohibitivc to the govcrnnlent . lur example, the Bundesbank Iav can he changed by a simple majority in Parliament, hut given the high public support the Bundesbank enjovs, no German government darcd to try thi s.

rhe status cl central bank mdc- pcndence requires a legal f'ramcwork that provides (i) tor independence of the (.entral bank as an institution and (ii) for independence ci the people sclectcd as policvmakcrs, thc central bankers. Roth is necessarv to achicvc an effcctive preconimitment. But note that thc govcrnment's pre- commitment is a neccssary though not a suil'icient condition For price stability. The government's precom- mitment may not hinder the mighty central bankers [rom running mone- tarv policv in a highly undcsirahle fashion.T'his has been cmphasized by the rnonetarists Frk'drnan (1963) aml Brunner (1983). In fact, on what grounds can we trust that indepen-

'1.KSW1kTSCHAITIIcI-I1 T(,UN(. 1997 21

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\1\NIRJ 1)

J. 1.

1 See PfleiJerer (1 97).

2 See for e.ample. Grill, ei al.

(1991).

dent central bankers will produce stal)k monev instead of inf1ation In contrast to lawvers, economists du

not helieve that writing the ohjective of' price stahility into the central bank law will soivc the problem.

When we look back into ecu- nomic historv, we [md that the empirical evidence on the effccts ul' central bank independence is rnixed.

For example, die German Reichs- bank became independent in 1922, shortiv hei ore die German inflation into hyperinflation. The status of indepcndencc .lid not makc a difkr- ence as thc cxccutive Imiard oF the Reichs- 1 ink continued its con- (pt of financing thc

)vernnlent in order tu a' oid bankruptcv of the '.t ate.) Fortunately, die historv after WWII of iii i''. National Bank and uf die Btiltbank shows that indept'ndent central bankers try tu avoid perma- nent inflation. Morcover, croSs- country studies indicate for indus- trial countries that thc long-term inflation perkrmance is signiEicantly iinke(1 tu the degrec of legal central bank independence. The marc mdc- pendent a central bank, die lower is average inflation. 2) This more rccent evidence is coniforting, yet we are still in necd ola theory that predicts such bchavior.

A. Independence of the lnstituton

Complete independence of thc insti- tution requircs that t.he central bank cannot he lorced hv the government to adopt an) specific course of action. Specillcaliy it requires that die government waives legaily the rights tu give instructions to die central bank, tu unload its debt at die bank, and to makc die countrv memher of an exchange rate system

with unadjustable parities. lt goes without saving that na existing cen- tral bank enjovs compkte indepen- dence. The challenging question is how dose we can get tu the statc dc- fined.

Freedom

from instructions

lnclependence starts with the free- dom from instructions. This iniplies that die government does not secure anv specifmc monetary policy decision for itseif, cloes not partic- ipate in the voting on poiicy actions and cannot veto any decision of die central bank's policymaking body.

Note that the postulate of freeciom front instructions does not include that the government needs to be exciudcd [rom the (leliberations of the central bank's policvmaking hodv. Given die intcrdepcndcncics of nionetary policy and liscai policy, it is usef'ul that central bankers ancl ministers kccp cach other weil in- formed about their pulicv views and intentions. However, it is important that ministers cannot block an) decision. Even the weak Form of' a suspensive veto is tu he discouraged as it can bc use(I tu put puliti- cal pressure an the policyniaking body.

The postulate 0f freedom from instructions is compatihic with writ- ing the objective of stable monev into the central bank constitution.

Though lt is a challenge to the econo- mist to deveiop an incentive-com- patible setup that does without this specific stipulation, it cannot hurt tu include it in die law. Morcover, die expiicit legal objective of price stahilitv does not just crcatc an obli- gation For die central bankers hut, in addition, it can serve them sheii the' have tu dcfend their policy course against the criticism in the political market. Hut note that die iaw shall not state additional objec-

22 VOLKSWIRTSCHAFTLICIII TcuN; 1997

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\1.\\lRi Dj.

1. Ni

11M\N\

tives that are independencc-reduc- tng. For exampic, tlw Bundesbank law stipulates that the Bank shail support the general economic poiicv ol the govcrnrnent, provided this does not C'()flhlict with thc prinary objective of safeguarding the valuc of thc currcncy. Though the Bundes- bank has heen ahle to live with it, lt is ohvious that such a provision invites conflict with the government and potentially Forces a central bank to he more expansioliarv for 1uite a time than is desirahle under the price stability objective.

ProhbitIon of Iendng to the public sector

Historv shows that an cffective means lor government of coliecting rnnre seigniorage than is compatihle vith price stabilitv is unloading public deht at die central bank. The classic reference is the German hvperinllation of 1921- 23. An es.

sential element of central bank in(lependence, therefore, is that the central bank is not permitted tu acquire public cieht of, any form.

This ruks out direct credit as weil as open market transactions in public honds or lillis. The latter provision mav not appear essential at flrst sight hut, in fact, lt is hecause trans- actions in public paper interkre with deficit tinance and, there- lore, potentialiv invite political pres.

sure.

lt is noteworthv in this respect thit modern techniques of hase rnonev control ca.n (10 without die ciassic type (Ji open market trans- actions in government paper replac- ing lt hy open market transactions in securfties under repurchase agree- ments. In tcrms of economic analysis the latter transactions are essentiallv loans to the 1)anking seetor. Though public paper mav he used to effcct those transactions, it just serves as collateral.

Participatlon In an exchange rate system?

The price stahility ohjective is not compatihle with fixed exchange rates. Given an international en- vironmen t that is i nflationary, only Iloating will permit to run an mdc- pendent monetarv policv. Similariv, die exchange rate wust be adjustahle in the case of real discquilibria between economies. C)therw ise the necessarv adjustmcnt of' relative prices enforces a shift in the do- ITleStic price level. 'lhereforc, lt is 1(1 be clarif'ied in the mon

etary constitution of country which t)l)jC(

tive ranks First. II' die primarv ohjective i price stability, as we a sume here, provision are indispensabk- thai guarantee that th cxchange rate reinains a(ljustahlc.

\Vhat are the options to achievc this? A maximum option is providing die central bank with die full author- ity to decide on all exchange rate and intervention matters. But note that international exchangc rate arrangements have freign pol iCV aspects. Moreover, since biriding international treaties can he con- cluded oniv by the government and ultimatelv by die parliament of a country, the maximum option would irnph to hand this authoritv to the central bank. Cicarlv, this is asking for to() much. While theoretically it is conceivabk to separate the substance of exchange rate nego- tiations from the formal legal aspect an(l, conscquentiv, let the central bank act as the fuily endorsed agent of die political system, in practice no govcrnment or parliament will accept to cease this competence.

Non-economists, who as a rule du not have trust in the wisdoni ofecon- omists, will he quick to point out

Vo1Ksw1RTscI1AITLICu TAcUN; 1997 23

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3 5« al.o hsing (1 992).

that the maximum Option implies a dcmocratic ckfldt. In fau, ec'on- omists are likely tu be kss inclined to give high prioritv to the exchange rate interests 01 special interest groups.

So vhat constitutional provision can we devise to avoid that the political system is ahle to undcrmine the objective of price stahilitv hv negotiating a system of fixed ex- change rates that efkctively reduces die central bank's independence?

-\ solution would be to

1)I(Vi(lC the central bank vith the right to ask die govcrnment l'or a ralignment and permit dic bank to puhlish its ioposal ii it is rejcct- ((1. This 'OUl(l put the

ntral bank in a strong position as foreign ex- Jiange markets are likely to drive the exuhange rate to- war(ls die level preferred bv the cen- - tral bank. Howcvcr, 1 acknow ledge that die proposal is ton ciemanding to he acepted by any government.

Fortunateiv, there is a minimum Option, nameiv to give die central bank die right to suspend interven- tion in support ot other currencies anv time the bank comes to die con- clusion that die internal valuc ol' its currencv vi1l bc cndangered other- wise. This Option provides the central bank with an emergencv brake and secures that the status of independence cannot he eroded completely bv the obligation to honor a specific exchange rate parity.

The provision permits die central bank to press the govcrnment hr an carly adjustmcnt of cxchange rate parities ii' thcre is a need to correct a fundamental discquilibrium. Recall, for exarnple, that in 1978, when the Gcrman governmcnt asked the E3undeshank tor its consent to die erection of die European Monetary

System (EMS), the Bundesbank demanrkd exactly this right and rc - ceived it by an internal agreement with the German governmcnt. The existunce of this right was not made

Ut)lL at die timc. Germany's part- ners did not lcarn about this right heforc the Bundesbank was forced to applv it. These days it is wideiv acccpted. it scems, that no system o fixed exchange rates .shuuld he erccted that denies central banks this right. At least the blueprint for die European Monetarv System II provides die European Central Bank (ECB) with this right, in oi-der to strcngthcn the position of die ECR vis--vis the "outs", i.e. the countries that will not become members ofthc European Monetarr Union from die start.

B. Independence

of the central bankers

Independence of the institution is usckss if die memhers of the central I)aflk's policvmaking hody, die cen- tral bankers, do not enjoy a status of personal inkpen(lcnce Irom governrnent and the political system.

As a Iact of lik, govcrnmcnts are always temptcd to implant in the policvmaking body people whose vita suggests that thcy might lean to die governifient in case of contlict.

Similarlv, intercst groups, such as labor unions and emplovers' associa- tions, have an interest that pcopk are selc(-ted whom they consicler to he sympathetic to their aims. Fortu- natelv, economic reasoning suggests that, individual characteristics aside, the likel-v on-avcrage performance ofccntral bankers is crucially shapcd hy die terms of office and the appointment procedurc.

lt mav be useful to clarifY at die outset what is desirabic to achieve. 1 have coined it once the Thomas- Becket cffcct (Neumann, 1991)1).

Thomas Becket was die Chancellor

24 - VOLK5W1RTSCHAITLt(11E TAGUNci 1997

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:\l1111)

j. 1.

\1LI\1\.\

of the Rritish King Henry II. In this function 1w was supposed to look after the King's interests in contain- ing the power ol the Chureh. Since Becket perforrned weil, the King im- plantcd hirn in the Church appoint- Ing hirn A rchhishop of Canterbury.

However, that was a scrious mistake.

Froni the verv day ol al)pointlnent, Recket ddcnded t he interests of thc Chunh against the King. The historical reniinder indicates the ilesirable state. The terms of office shouki he such that the appointce ha, the incentive to disrcgard bis or her f(.)riner j)c)Iitical dcpenkncies anl takes on die icutral bank's uhjective of safeguarding th value of the currencv as a ncw personal ieitnmtil.

Thc most iniportant aspect is tin lengih of c ntract. Ehe longer th exj)ectcd (luration of ofhce, th snlaller vill lic the J)ersorial (Iiscoullt rate, that is die marc veight will ccii tral bankers put on die medium ic

long run instead of die short run.

1 ong(Ir contract lcngth proniotes personal independence, providcd ccntrai bankers cannot lx' dismissed 1w the govcrnrnerit any tirne.4)

idealiv, the agc of appointmcnt and the duration of ofFice are combined such that die appointec can trust that serving an the central bank will cml UOfl normal retirement. For example, in Germanv central bank- ers serve 14 years on average and Ieavc the bank at the age of 66. Since the normal (and maximum) contract Iength is 8 years, they need re- appointnu'nt. And this higlilights ant )ther i mpurtant as1xct: die terms c)f rcapp()intnlent. II reappoinnnent (lepdnds or is likelv t() de1wnd OD the governnient's perceptions as regar(ls die central banker's policv views, Icaning towards die views of govern- nient during die f'irst terni vill be

)Ti1( )te(] . lt. lolh)'VS that reappoint_

ment should l)e uncon(litional as it is the prauice in German.

Another aspct is salaries. \Ve nce(l not take thiS UI) here in detail.

Sufhce it to say (hat the need ol income sanctions, emphasized hv sorne economists, is in douht.Vauhel (1 99) was the first to propose that the personal incolne of central I)ankers should he cut ifthey produce inflation, and Walsh ( 199) has designed a specific contract that links the rernuncration in a linear, negative fashion to the rate ol infla- tion. However, there is n() c\ideflcc

ilitt sU(}i a ccIitl,l&1 i' iI(l!l)tflS1l)!t

to indm ,-mral l)aIlkc!'. tu du tIlc

right thing. Sviss ami (jerman central bankers, fr cxaniptc, havc (lOne a deccnt job lr decades even though their salaries are positively, linked to expected inliation, given that thev risc with die general pay incrcascs ofcivil servants.

C. Supplementary provisions

Even though terrns ol apj)ointmcnt amd office are the most iniportant aspccts as rcgards personal indepen - (lence, it is uselul to have supplenicn- tarv provisions, such as a staggering ok eontraets, a decentra lization of app()intlnents, the CiC(tiOl1 of the central bank's governor hv the cen- tral bank council an(I die explicit right for central bankers to advisc the goernment on all policv issues that may have implications For mone- tary policy and the stability of the currcncy.

Staggcring of contracts rules out that at any point of tinle a larger

3 Fireampk. undcr ihe Ir,,ccjc cent rot bank bw vati,) unril 1994.

ihe ;rnor 'f:Ice Ronc1ne Je Fr,ince „ccc appo:nted /r lcfctime.

lloweccr, he coulj he/crcd an) i ‚mc h' Jec:scon of the French Preccdcnt.

cee .11alinc'ccuJ (1991)

O1.KSWIR1SCIIAFT!l(11I. lAG (ING 1997 (7\H 2

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LllkN) j. \ LUM,N

numher of central bankers can be appoiiitcd duc to a clustering of retirernents. Thus, staggering of contracts is a device ior rcducing the potential influcnce of the govern- rnent on the dominant poliev view of the central bank ccnincil at a specifle (tate. Thc potential influcncc ofanv specific governrnent is further reduc(1 ii duc tu a federal ('oflsti- tution ot the countrv - th(- authoritv of a,)pointnent is spllt hetwecn the central goernn1cnt and state tin&nl' in ill ikiliuud

r: j1n)rttd 1\ Iiikrcnt rlri.i ii l)art1ts. As a rufe, thc goernurs of eentral banks are appoitted 1w the govcrnmcn t s. 1-lowever, given the prominent p si tiofl 01 governor an(l the specific iniluence that goes with it (adviser tu the govcrnment, partic ipation in international negotia- tions). it has merits to consider the alternative solution ol having thc governor clected hv the mernbers of thc central bank council. This proce- dure was aclupted hv the Bank deut- scher länder, thc predecessor ol thc BulKksbank.

Finaliv, it secms obvious that central bankers have the obligation to give advice tu the governmcnt.

This does not reduce thcir indepen- (kflce in anv wav. What is less ohsious is that the bankers should have thc right to adise the govern- ment on all pulli) issues that im- pinge on munetarv and cxchange rate matters. lf giving advke is just an obligation instead of a right, the governmcnt can avoid

anv undesired advice hy not asking for it.

IV. Why do Independent central bankers long tor prtce stabilityl

lt is in the nature of the contracts of- fered by the governmeiit tu central bankers that thev are incomplete, i.c. the contracts do not link weIl- defincil pav- otis tu conceivahle specific actions. ()n thc contrar, the essence ui the Status of independence

s that the bankers cnjoy the f'reeclom of discrction, given the implicit uiiticrstanding that this (liS(TCtiOfl will be used tu safeguard the internal

a}uc ol the curr(,ncv.

\t this point, we have to take UI) undamental issue raised hy the

- theoretic macro l iterature.

\ince thc insighdul analysis of Rarro aiicl Gordon ( 198 3) this literature iinphasiies the inflation hias of tirne consistent rnonC'tary pol icv. The bias results From the asuniption that cen- trat bankers maxiniize a weltare function that i nclud es an ambitious output or employment target and, consequently, makes it optimal tu try producing surprise inflation. Since rational vage -sctw rs kn 'V this, thev anticipate die equilibriuni rate uf inflation and, consequcntly, force the central bank tu validate it. Though Rugoff ( 198S) showcd that it niay be optimal tor socictv tu appoint a central banker who is more conscr- vative vith respcct to the desirability of surprise inflation, this litcraturc has not led to a satisfactory theorv of central bank independence. Rogoff's central banker necils some degree of indcpendencc in order tu be abk to run a kss cxpansionarv monetary- policv. Yct, this hvpothetic banker fails to achicvc price stabilitv because he er she accept.s the govcrnrnent's deinand that monetarv j)ulic'v shall trv to raisc emplovment above the natural rate kvcl. 1iis assumption is

26 e'1\fi VOLKSWIRTSCHAFFLICHlz TAUN(; 1997

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