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Considers institutional complementarities at the macroeconomic level. It examines unemployment and inflation management in developed democracies, stressing the interactions of central‐bank independence and wage/price‐bargaining coordination with each other and with the sectoral structure of bargaining in determining monetary—policymakers’ and wage/price‐bargainers’ incentives. The evidence from 21 developed democracies over 20 years of flexible exchange rates supports the argument that credible monetary conservatism and traded‐sector‐led (not public‐sector‐led) coordinated bargaining, complement in producing low unemployment and substitute in producing low inflation.

This chapter focuses on postcommunist governments' initial choice to adopt legislation granting independence to their central banks, examining both the universal acceptance of such legislation and the specific cases of Hungary, Czechoslovakia, and its successor states—the Soviet Union/Russia and Kyrgyzstan. Legislating central bank independence does not mean that a government will necessarily respect its own laws in practice, but it does indicate that postcommunist governments found value in passing these laws. Examination of the initial choice processes in Hungary, Czechoslovakia, Russia, and Kyrgyzstan demonstrates concretely how postcommunist governments converged on legal central bank independence from different starting places and through internationally mediated mechanisms. Across the board, the international consensus on central bank independence, the external incentives to adopt it, and the atmosphere of deep domestic economic uncertainty ultimately made such legislation the preferred policy choice of these disparate postcommunist governments.

This chapter views the entire transplantation experience through the lens of the global financial crisis, which fundamentally challenged the central banking model that the transnational community had just spent two decades intensively promoting to the postcommunist world. Leading central banks were forced to adopt unconventional monetary policies to address the challenges of the crisis and to rethink their basic mandates and operations. In addition to defending against inflation, central bankers were now to expand their monetary policy toolbox, engage in macroprudential regulation, and take a stronger role in micro-level financial sector regulation and supervision. These wider mandates, in turn, undermined the predominant rationale for central bank independence because they demanded increasing cooperation with other government agencies and more overtly engaged political questions of regulation and distribution.

This chapter shows that central banks in Arab oil exporters are not independent. Low independence reflects institutional arrangements that allow the executive branch to influence, interfere, even dominate central bank operations. In a context of weak institutions, central bank independence (CBI) has not always mattered for macroeconomic policy outcomes. Gulf Cooperation Council (GCC) central banks delivered a better macroeconomic policy performance than those of the populous group because the credible peg discouraged discretion. Soft peg arrangements in the populous economies, in a context of weak institutions and discretionary policymaking and no de facto independent central bank, led to disappointing monetary policy outcomes. As oil exporters adapt to a new normal of low oil prices, the sustainability of fixed exchange rate regimes may not be guaranteed without sound macroeconomic institutions. Stronger institutions and effective accountability mechanisms are needed to insulate central banks from political pressures. In the short term, a rules-based framework could help.

Chapter 6 locates historically the doctrine and practice of central bank independence. It uses the illustrious career of Alan Greenspan, former Chair of the US Federal Reserve to introduce a history of central banking. Greenspan advocated ceaselessly for the deregulation of finance thanks to his faith in private decision makers keeping an eye on themselves and their debtors. That faith that was shattered by the crisis of 2007–8. A history of US banking shows how banking has swung between hard money and soft money. Finance serves the powerful but has always been contested ground, be it between competing elites such as agrarian and financial-industrial interests fighting over the first central banks of the United States, or between an elite and the dispossessed after the Great Crash of 1929. Brief histories of banking in several European countries are provided.

This chapter discusses monetary policy. It is informally divided in two parts: The former discusses the rationale for and the main features of the current institutional ‘architecture’ related to monetary policy. A formal analysis of time inconsistency of optimal discretionary policy and the concomitant inflationary bias is followed by analyses of commitment and reputation. Subsequently, the Chapter looks at possible resolutions of the difficulties associated with discretionary policy, including independent Central Banks and inflation targeting. It also discusses the new features and proposals that emerged post-2007–9. A ‘policy in practice’ section looks at Taylor rules. In the latter part, we review the recent analyses on financial structure and the ‘credit channel(s)’ of monetary policy transmission. The chapter concludes with a review of Quantitative Easing, macroprudential regulation, and the current thinking on monetary policy as part of a wider package of optimal stabilization policy.

A case study of the rhetoric and heresthetics of Margaret Thatcher, Tony Blair, and Gordon Brown. It examines Thatcher's slogans: the free economy, where she succeeded, and the strong state, where she failed. The first changed the universe of political debate; the second destroyed the Conservative Party, as it split into its Europhile and Eurosceptical wings. The most successful heresthetic since 1997 has been Brown's grant of central bank independence within days of taking office.

The Introduction describes the main themes and objectives of the book and provides an overview of its content. First, the current dominant view on the origins of central banking is recalled and challenged, and it is outlined what alternative view this book will propose, namely that central banking dates back to before 1800 and that a number of European continental institutions played a major role in its development. Then an overview of the chapters of the book is provided: Chapter 1 restating the currently dominant view on the origins of central banking; Chapter 2 on money issuance; Chapter 3 on the relation with the government; Chapter 4 on lending to the private sector; Chapter 5 on the lender-of-last resort; Chapter 6 on the overall balance sheet of early central banks; and Chapter 7 restating the rehabilitation of early central banking; The annex schematically reviews a total of 25 central banks operating before 1800.

This chapter looks at the evolution of specific ideas about monetary policy within the Bank of Japan (BOJ) organization, including the formative experiences that shaped the worldview of the BOJ. The BOJ's post-World War II monetary policy experiences have been especially influential in shaping the BOJ's perspective, particularly those since the 1970s as Japan became the world's second largest economy and came under growing pressure to help manage the global economy. The notion that there is a BOJ worldview is reflected in the observation by commentators and economists alike that the BOJ is guided by a “BOJ theory.” There are three elements of the BOJ view: a premium on price stability; skepticism about the extent to which monetary easing can spur economic growth and concern that it can generate adverse impacts; and an expansive interpretation of central bank independence.

Since late 2009, the EU has made decisive steps towards the creation of fiscal capacity through the monetary backdoor. Paradoxically, it was the attempt by member states to prevent further fiscal integration and the creation of further competences for the Commission that led to fiscal integration by default. The European Central Bank felt pushed to accept a politically salient fiscal responsibility that is hard to reconcile with the status of an independent central bank. Contrary to a Eurosceptic account of the crisis, it was the threat of financial meltdown, not government debt, which forced the hands of monetary policy. Fiscal integration through the monetary backdoor is a pertinent example for the integration of core state powers being demand-driven. Yet this integration differs from earlier federal state building because of the weakness of the centre and consensus requirements that cannot be met at the moment.

This chapter examines the myth and reality of Ordo-liberal intellectual capture of Germany and the role of Ordo-liberalism in efforts to construct a new post-war national unifying myth. It focuses on the genesis of the concept of the social market economy and its relationship to Ordo-liberalism; on the distinction between fundamentalists and realists in Ordo-liberalism; and on the differences between philosopher-economists and statesmen-economists. Close attention is paid to the ideas and role of Ludwig Erhard and his network of support; the institutional appropriation of Ordo-liberalism by the Bundesbank, the federal cartel office, and the federal economic ministry’s economic policy division; and the role of Ordo-liberalism in competition policy, in European economic and monetary union, and in German policy during the euro area crisis. At the same time, stress is placed on the gaps in Ordo-liberal thinking and counter-national unifying myths, drawing on social Catholicism, social partnership, and civilian power. The chapter has three main case studies: of Ordo-liberalism in the Great Depression, focusing on the Brauns Commission, the Lautenbach Plan, and the role of Wilhelm Röpke; central bank independence, monetary policy reform in the early 1970s, and the ‘monetarist revolution’; and Alfred Müller-Armack’s proposal for a European Stabilization Board. These case studies use archival evidence. The chapter closes with reflections on the significance of Ordo-liberalism in Germany.

Chapter 6 reviews Japan’s official foreign exchange market intervention, which became virtually the only standard tool of managing the exchange rate. After presenting an overview of the institutional and political economy aspects of intervention, the chapter explains how and why authorities intervened and discusses the external and domestic contexts within which intervention decisions were made. By drawing on the large empirical literature that has emerged on Japanese intervention, it assesses whether intervention was effective in influencing the exchange rate in a desired direction, while taking note of the high degree of cooperation the central bank and the government displayed during the latest episodes, evidently to enhance the effectiveness of intervention. The concluding section discusses possible channels of intervention effectiveness based on the Japanese experience

The chapter discusses issues related to the future of monetary policy. It argues that the crisis forced central banks to take extraordinary actions and an ever-expanding mandate, which raises important issues of accountability and independence. The chapter also reviews the relation between monetary policy, macroprudential policy and financial stability, and argues that the distinction between the two types of policy is not always clear cut, for example in the case of foreign exchange market interventions. The chapter concludes with a discussion of spillovers from monetary policy in advanced economies, and argues that there are no definitive answer on how should emerging market economies respond.

In this chapter, we summarize the main arguments of the book and draw lessons for future policy makers. Using the fundamental trilemma of international finance as its organizing principle, the chapter first reviews the evolution of monetary and exchange-market policies concluding that sterilized intervention does not offer a means of systematically affecting exchange rates independent of monetary policy. Sterilized interventions can sometimes affect exchange rates when central banks have better information than private market participants, but these instances are relatively rare events. Our historical study of the Federal Reserve also cautions that foreign-exchange intervention can create uncertainty about a central bank’s commitment to its domestic policy objectives, and, when intervention falls under the fiscal authority’s direction, can weaken central-bank independence.

Big drivers of domestic inflation, as they formulated in the Phillips Curve, are: (1) The price of imports and the exchange rate; (2) capacity pressures and labor market tightness in the domestic economy; (3) Public expectations about future inflation, future exchange rates, and future foreign prices; and (4) The amount of trading world slack. The level of foreign wages are also important for countries open to labor mobility. The 1990s globalization wave, which Israel was a part of through the integration of its financial sector into the world economy, and the massive immigration, helped Israel’s inflation to converge to the developed countries inflation rates.

This chapter draws a distinction between a reserve currency and a safe haven currency, one that investors turn to for safety during times of financial turmoil. The chapter identifies the characteristics of economies that are home to safe haven currencies. These characteristics include an open and transparent democratic form of government; an independent judiciary; trusted public institutions; central bank independence; and freedom of expression. The chapter argues that the present Chinese leadership’s repudiation of broader political, legal, and institutional reforms makes it unlikely that the RMB will ascend to the status of a safe haven currency.

The aim of macroeconomic stabilization is restoring price stability and reducing monetary, fiscal, and balance-of-payment imbalances. Macroeconomic stabilization is particularly needed when a country suffers from high inflation or hyperinflation. To stop such an inflation one can choose between three types of anti-inflationary programmes: orthodox money-based, orthodox exchange rate-based, and heterodox. Other cases of macrostabilization policy include reducing excessive fiscal deficit and public debt before they become monetized, dealing with the deflationary consequences of the systemic banking crisis, reducing the excessive current account deficit, dealing with the consequences of a sudden stop in capital flows, and fighting chronic moderate inflation. Fiscal rules, and the independence of monetary and fiscal institutions such as central banks, play an important role in preventing macroeconomic instability. National macroeconomic policies are also monitored from outside, for example by the International Monetary Fund and European Commission (in the case of EU member states).