Publication of the week: Professor Geoffrey Wood and Dr Juan Castañeda1 August 2016
Forrest Capie, Geoffrey Wood and Juan Castañeda, “Central bank independence in small open economies”, in M.D. Bordo, Ø. Eitrheim, M. Flandreau & J.F. Qvigstad (eds), Central Banks at a Crossroads: What Can We Learn From History? (Cambridge: Cambridge University Press, 2016), 195-230. ISBN: 978-110-714966-3.
The authors of this chapter conduct an empirical analysis of eight economies covering more than a century and find that independent central banks tend to be more durable in their independence in small open economies than in large economies. This is because the former have the option of being, and often are high trust societies, which allows the writing of simple, and therefore less affected by shocks, central bank contracts, and as Milton Friedman argued many years ago in his pioneering discussion of central bank independence, central banks need a set of instructions and that takes the form of a contract.
The volume is the result of an international conference held at Norges Bank (the central bank of Norway). International experts and policy makers present research and historical analysis on the evolution of the central bank. They specifically focus on four key aspects: its role as an institution, the part it plays within the international monetary system, how to delineate and limit its functions, and how to apply the lessons of the past two centuries.