Etienne Farvaque

Political determinants of central bank independence

Abstract The paper develops earlier studies on central bank independence (CBI) by relating it to political variables. Evidence shows that more stability-oriented societies give more independence to their central bank. Presence of a higher chamber and federalism play determinant roles in the results.

Selecting Your Inflation Targeters: Background and Performance of Monetary Policy Committee Members

Abstract This paper starts by describing the composition of monetary policy committees (MPCs) in inflation-targeting and non-targeting countries. The experience of MPC members on their inflation performance is then compared, opposing inflation targeters with non-targeters. Our sample covers the major Organization for Economic Cooperation and Development countries, in the period 1999-2008. Our results first show that MPCs are different in inflation-targeting (versus non-targeting) countries. They also reveal that policy-makers’ backgrounds influence inflation, and that the influence of MPCs’ experience is much greater in inflation-targeting countries, while size effects are more important for committees that do not target inflation.

Who Supports the ECB? Evidence from Eurobarometer Survey Data

This paper contributes empirically to the long-debated issue of the legitimacy of the European Central Bank (ECB) with regard to European polities. Using micro-level data from the Eurobarometer survey, we shed light on the socio-demographic determinants of public-opinion support for the ECB. We find that people with higher level of education and income and centre to right-wing political orientation tend to support the ECB, as well as people with optimistic expectations on the economic situation. By contrast, the unemployed tend to distrust the ECB. The policy relevance of such results is important for ECBs communication strategy with the general public.

Central bank independence and ageing

We contrast the influence of demography and Central Bank Independence (CBI) on inflation. The recent demographic trends in developed countries are shown to weight more on inflation than CBI, while the contrary stands for the period from 1960 to 1979.

Are Transparent Banks More Efficient? Evidence from Russia

This study examines the relationship between bank transparency and efficiency. Using a unique data set for Russian banks, we find that transparency is important and that, among the dimensions of transparency, the transparency in board and management structure and process represents the most significant determinant. These results are controlled for size effects, the structure of liabilities, the structure of assets, and nonperforming loans. This highlights the role of transparency in improving efficiency, particularly in transition economies.

The Grand Experiment of Communism: Discovering the Trade-off between Equality and Efficiency

This paper aims to explain the rise and fall of communism by exploring the interplay between economic incentives and social preferences transmitted by ideology. We introduce inequality-averse and inefficiency-averse agents and analyze their conflict through the interaction between leaders with economic power and followers with ideological determination. The socioeconomic dynamics of our model generate a pendulum-like switch from markets to a centrally-planned economy abolishing private ownership, and back to restoring market incentives. The grand experiment of communism is thus characterized to have led to the discovery of a trade-off between equality and efficiency at the scale of alternative economic systems.

Public Attitudes Towards Central Bank Independence

This study examines public opinion in 15 European countries, on the proposal to establish an independent European Central Bank (ECB). Using data from Eurobarometer surveys for 1998 to 2000, which included a specific question on this, we show that inflation performance is not sufficient to explain peoples preference for an independent central bank: personal characteristics and circumstances have a stronger impact, with gender, employment status, education level, income quartiles, and degree of information and civic concern showing particular relevance.

The political economy of balanced-budget rules

The paper first reviews the evolution of federal fiscal rules in the United States, showing a trend towards balanced-budget rules, not golden rules. An explanation to this trend is provided in a model that includes voters preferences that are skewed by the history of the budget structure, and fiscal rules on the budget. Previous results in the literature are generalized, and the implications of fiscal rules for the use of debt as a strategic asset in the hands of politicians are derived. The inclusion of a golden rule of public finance is compared with that of a balanced-budget rule. Because of the presence of habits, we show that politicians are more prone to adopt balanced-budget rules than a golden rule.

US Interstate Risk Sharing: A Post-Crisis Examination

This paper examines the modalities of risk sharing in the United States, and their evolution between the pre-financial crisis period and the post-crisis one. Reassessing the mechanisms at play in the US economy, we document a lower share of adjustment coming from capital markets, in comparison to previous estimates. The measures taken during the crisis have not impacted the absolute degree of risk sharing, although the relative size of its components has changed, with a stronger role for the federal government.

OPTIMAL TERM LENGTH FOR AN OVERCONFIDENT CENTRAL BANKER

This paper discusses the implications of overconfidence when it affects a monetary policy maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Incorporating them into a standard New Keynesian framework, we consider the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should always be lengthened when these two types of biases increase by the same percentage magnitude.