Helge Berger

Central Bank Independence: An Update of Theory and Evidence

This paper reviews recent research on central bank independence (CBI). After we have distinguished between independence and conservativeness, the literature on optimal inflation contracts is discussed, followed by research in which the inflationary bias is endogenized. Finally, the various challenges that have been raised against previous empirical findings on CBI are reviewed. We conclude that the negative relationship between CBI and inflation is quite robust.

The Euro’s Effect on Trade Imbalances

When does trade become a one-way relationship? We study bilateral trade balances for a sample of 18 European countries over the period from 1948 through 2008. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. This is consistent with indications that pair-wise trade tends to be more balanced when nominal exchange rates are flexible. Intra-euro area imbalances also seem to have become more persistent with the introduction of the euro, some of which is linked to labor market inflexibility. Reviewing the direction of imbalances, we find that bilateral trade surpluses are decreasing in the real exchange rate, decreasing in growth differentials, and increasing in the relative volatility of national business cycles. Finally, countries with relatively higher fiscal deficits and less flexible labor and product markets exhibit systematically lower trade surpluses than others.

Searching for Political Business Cycles in Germany

One reslt of the revitalised literature on political business cycles is that there are signs in German data that elections and ideology have an impact. However, using monthly data for the period 1950-1989, and standard methods of time series analysis, we reject both the Nordhaus hypothesis of opportunistic cycles and the partisan approaches by Hibbs ans Alesina. We show that some results are sensitive to the assumption of stationarity. There are signs of policy cycles in M1. It is hard, though, to bring this in line with the Rogoff hypothesis of rational opportunistic cycles because of the German institutional setting.

Are small countries too powerful within the ECB

This paper analyzes the possible consequences of diverging economic developments within the euro area, given the current decision-making process of the European Central Bank (ECB). For the German Bundesbank, the role model of the ECB, there is evidence that differences in the economic situation in the various states affected voting behavior in the Governing Council. For the euro area countries, the paper finds that, despite convergence, important differences in terms of economic performance and preferences remain. As all national central banks have one vote within the Governing Council of the ECB, there is a risk that national considerations may prevail over EMU-wide considerations.

Forecasting ECB Monetary Policy: Accuracy is (Still) a Matter of Geography

Monetary policy in the euro area is conducted within a multicountry, multicultural, and multilingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the European Central Bank (ECB)? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part, this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent.

One Country, one Vote? Labor Market Structure and Voting Rights in the ECB

The pending enlargement of the European Monetary Union (EMU) has brought to the fore the discussion of the voting right distribution in the European Central Bank (ECB) council. We show that, in a model where labor unions internalize the inflationary consequences of wage setting, deviating from a voting scheme based purely on economic size can be beneficial. Preliminary evidence on unemployment and voting rights in the ECB council seems broadly in line with this idea. We also point to possible policy implications for EMU enlargement and ECB restructuring.

The Bundesbank's path to independence: Evidence from the 1950s

The German Bundesbank is frequently called the worlds most independent and conservative central bank. Taking account of the path dependency of this reputation, both quantitative data and qualitative data on German central bank law and political conflicts are used to determine the factors that contributed to this reputation in the 1950s. It is shown that quantitative analysis has its limits and that law might be a misleading indicator in this respect. It is rather the analysis of policy conflicts between the Bundesbank and the government that yields information on the banks path to independence.

How opportunistic are partisan German central bankers: Evidence on the Vaubel hypothesis

Abstract Recent research has found inconclusive evidence regarding the presence of opportunistic political business cycles in German data. Inferring from Vaubel, 1993 , Vaubel, 1997 one could argue, however, that at least in the case of monetary policy the results are seriously flawed from the onset, because an independent central bank such as the German Bundesbank will support the government only when it shares its partisan views. Vaubel has not presented parametric empirical evidence in support of his hypothesis. We show that the application of time series analysis yields results that clearly run counter to the hypothesis. Evidence on voting behaviour from the central bank council minutes points in the same direction. It appears perhaps paradoxically that an opportunistic government is better off facing an ideologically opposing Bundesbank council majority than a supportive one before elections.

Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARS

We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.

The ECB and Euro-Area Enlargement

The likely enlargement of euro-area membership will radically change the environment under which monetary policy will be made in the euro area. Within less than a decade, the number of member countries in the euro area could more than double, with the vast majority of accession countries being relatively small in economic terms, compared with current members. Absent reforms, such a significant but asymmetric expansion could impede the effectiveness of the institutional policymaking process of the European Central Bank (ECB) and be seen by some as resulting in the overrepresentation of small member countries in the ECB Council. The paper illustrates these issues, describes the principles on which reforms of the ECB statute could build, and discusses four specific institutional reform scenarios. The analysis coincides with the ECB Council being scheduled to present suggestions for reform by late 2002.