11

Corporate Governance and Corporate Governance and Effective Central Banking: Effective Central Banking:

Cross Country Empirical EvidenceCross Country Empirical EvidenceIftekhar Hasan*Iftekhar Hasan*

Loretta J. Mester**Loretta J. Mester**

* Rensselaer Polytechnic Institute* Rensselaer Polytechnic Instituteand Bank of Finlandand Bank of Finland

** Federal Reserve Bank of Philadelphia** Federal Reserve Bank of Philadelphiaand University of Pennsylvaniaand University of Pennsylvania

Dubrovnik, June 28, 2007Dubrovnik, June 28, 2007

22

MotivationMotivationThe legal and institutional framework governing The legal and institutional framework governing central banks around the world has undergone central banks around the world has undergone significant changes in recent yearssignificant changes in recent years Implementation of monetary policy without Implementation of monetary policy without

political influence, including institutional changes political influence, including institutional changes to make monetary policy more effective and to make monetary policy more effective and transparent (e.g., Reserve Bank of New Zealand, transparent (e.g., Reserve Bank of New Zealand, 1989; Bank of England, 1997; Federal Reserve in 1989; Bank of England, 1997; Federal Reserve in the U.S., 2006)the U.S., 2006)

33

Motivation – cont’Motivation – cont’There has also been discussion focusing on There has also been discussion focusing on central bank supervising effectiveness in the central bank supervising effectiveness in the context of large corporate bankruptcies with links context of large corporate bankruptcies with links to the financial sectorto the financial sectorThese issues have increased the interest in better These issues have increased the interest in better understanding the role of good governance in understanding the role of good governance in improving the effectiveness of central banks and improving the effectiveness of central banks and yielding improved economic outcomes (e.g., yielding improved economic outcomes (e.g., Lybek & Morris 2007; Frissel, Roszbach & Lybek & Morris 2007; Frissel, Roszbach & Spagnolo 2007) Spagnolo 2007)

44

Motivation – cont’Motivation – cont’Recent empirical work suggests a positive Recent empirical work suggests a positive association between the quality of central bank association between the quality of central bank regulation and supervision and nations’ economic regulation and supervision and nations’ economic growth, due to efficient access to and allocation of growth, due to efficient access to and allocation of financial resources (e.g., Laeven and Levine 2003; financial resources (e.g., Laeven and Levine 2003; Sapienza and Zingales 2003)Sapienza and Zingales 2003)However, the design of the optimal contract, the However, the design of the optimal contract, the possible trade-off between achieving monetary policy possible trade-off between achieving monetary policy goals and financial stability objectives and the link goals and financial stability objectives and the link between central bank independence, accountability between central bank independence, accountability and supervision performance have received only and supervision performance have received only marginal attention.marginal attention.

55

The purpose of this paperThe purpose of this paperIs there a significant statistical relationship Is there a significant statistical relationship between central bank governance and between central bank governance and institutional structure and the economic institutional structure and the economic outcomes that reflect the performance of outcomes that reflect the performance of central banks?central banks?Does this relationship differ across countries Does this relationship differ across countries in different stages of economic development?in different stages of economic development?

66

Our contributionOur contributionAdd to the growing literature on Add to the growing literature on governance, organizational form, and governance, organizational form, and central bank performancecentral bank performance Determine whether measures of governance Determine whether measures of governance

and organizational form are associated with and organizational form are associated with better economic outcomes, while literature better economic outcomes, while literature has focused on developing governance has focused on developing governance measures for central banksmeasures for central banks

Provide cross country evidence, while Provide cross country evidence, while literature has focused on developed countriesliterature has focused on developed countries

77

Review of literatureReview of literatureCentral bank responsibilities and corporate governance – key Central bank responsibilities and corporate governance – key roles: roles:

Central banks’ key roles: macroeconomic stability (low Central banks’ key roles: macroeconomic stability (low inflation), stable exchange rates, and the fostering of maximum inflation), stable exchange rates, and the fostering of maximum sustainable growth (See, e.g., Caprio & Dimitri 1995; Mayes sustainable growth (See, e.g., Caprio & Dimitri 1995; Mayes 1997; Leybek 2002; Tuladhar 2005).1997; Leybek 2002; Tuladhar 2005).

Most central banks are responsible for stability of the payment Most central banks are responsible for stability of the payment and settlement system (e.g., Healy 2001).and settlement system (e.g., Healy 2001).

Several banks have some responsibility for directly supervising Several banks have some responsibility for directly supervising and examining commercial banks for safety and soundness. and examining commercial banks for safety and soundness.

Many central banks deliver banking services (cash, check, Many central banks deliver banking services (cash, check, credit etc. e.g., Flannery 1996) – given the technological credit etc. e.g., Flannery 1996) – given the technological change in the payment services has led consolidation of check change in the payment services has led consolidation of check processing sites within the U.S. Fed has led the Fed to think its processing sites within the U.S. Fed has led the Fed to think its corporate governance.corporate governance.

Frisell, Roszbach & Spagnolo (2007) – in a survey of mostly Frisell, Roszbach & Spagnolo (2007) – in a survey of mostly European countries found most frequently cited central bank European countries found most frequently cited central bank roles were monetary policy, financial stability, payment system roles were monetary policy, financial stability, payment system and supervisory objectives.and supervisory objectives.

88

Review of literature – cont’Review of literature – cont’Why is the governance of central banks more complex Why is the governance of central banks more complex than that of other corporations?than that of other corporations? The multiplicity of central bank goals and the difficulty of The multiplicity of central bank goals and the difficulty of

measuring performance across the central bank’s goals measuring performance across the central bank’s goals suggest that transparency may not be easily achieved suggest that transparency may not be easily achieved (Frisell, Roszbach & Spagnolo 2007)(Frisell, Roszbach & Spagnolo 2007)

There is also intrinsic opaqueness of the banking There is also intrinsic opaqueness of the banking business that reduces the effectiveness of governance business that reduces the effectiveness of governance mechanisms (Adams & Mehran 2003; Caprio and mechanisms (Adams & Mehran 2003; Caprio and Levine 2004)Levine 2004)

In addition, as a monopoly provider of public goods (a In addition, as a monopoly provider of public goods (a stable currency and a well-functioning payment system), stable currency and a well-functioning payment system), a central bank is insulated from the disciplining forces of a central bank is insulated from the disciplining forces of product market competition and the market for product market competition and the market for corporate control (Frisell et al. 2007)corporate control (Frisell et al. 2007)

99

Review of literature – cont’Review of literature – cont’

Are there ways to organize the central bank that Are there ways to organize the central bank that would lead to better incentives and economic would lead to better incentives and economic outcomes?outcomes? Numerous studies demonstrate a clear link between Numerous studies demonstrate a clear link between

political and monetary instability (e.g., Bagheri & political and monetary instability (e.g., Bagheri & Habibi 1998)Habibi 1998)

Independence from the government might enhance Independence from the government might enhance central bank effectiveness (e.g., Alesina & Summers central bank effectiveness (e.g., Alesina & Summers 1993; Lybek 1999; Fischer 2005; Cukierman 2005)1993; Lybek 1999; Fischer 2005; Cukierman 2005)

1010

Review of literature – cont’Review of literature – cont’ Monetary expansions driven by political factors seem Monetary expansions driven by political factors seem

to be the main cause of high inflation in transition to be the main cause of high inflation in transition economies (Maliszewski 2000)economies (Maliszewski 2000)

Severe fiscal imbalances and narrow financial markets Severe fiscal imbalances and narrow financial markets lead inevitably to monetary deficit financing (Bagheri & lead inevitably to monetary deficit financing (Bagheri & Habibi 1998)Habibi 1998)

Delegating monetary authority to central banks that Delegating monetary authority to central banks that are highly averse to inflation may reduce ‘inflationary are highly averse to inflation may reduce ‘inflationary bias’ (Maliszewski 2000)bias’ (Maliszewski 2000)

1111

Review of literature – cont’Review of literature – cont’ Therefore, institutional devices such as central bank Therefore, institutional devices such as central bank

independence and strong governance could independence and strong governance could potentially impose financial discipline on policy potentially impose financial discipline on policy makers and restrict them from short-sighted makers and restrict them from short-sighted monetary expansion (Lybek 1999)monetary expansion (Lybek 1999)

Board size, tenure length and turnover of the board Board size, tenure length and turnover of the board chair, board independence – evidence exists for chair, board independence – evidence exists for corporations, but the impact on central bank corporations, but the impact on central bank performance is not clear a priori and empirically performance is not clear a priori and empirically limited (e.g., Dreher, Sturm & de Hann 2006; limited (e.g., Dreher, Sturm & de Hann 2006; Cukierman, Webb and Neyapti 1992)Cukierman, Webb and Neyapti 1992)

1212

DataDataCentral banks’ websitesCentral banks’ websitesInformation given upon request from some central banks Information given upon request from some central banks Thomson’s Bankscope databaseThomson’s Bankscope databaseIMF international financial statisticsIMF international financial statisticsMorgan Stanley-Central Bank Directory (several issues)Morgan Stanley-Central Bank Directory (several issues)BIS publications of blue books, orange books, individual BIS publications of blue books, orange books, individual annual reportsannual reportsWorld development indicators World development indicators Annual data 1996-2000Annual data 1996-2000Include countries whose central banks were established Include countries whose central banks were established in 1993 or earlierin 1993 or earlierClassify countries into 3 groups: transition, developing Classify countries into 3 groups: transition, developing and developed economies and developed economies

1313

Sample by countriesSample by countriesTransition Economies:Transition Economies: Albania, Armenia, Belarus, China, Croatia, Albania, Armenia, Belarus, China, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Latvia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Latvia, Lithuania, Moldova, Mongolia, Poland, Russia, Slovakia, Slovenia, Lithuania, Moldova, Mongolia, Poland, Russia, Slovakia, Slovenia, Ukraine (19)Ukraine (19)

Developing Economies:Developing Economies: Aruba, Bahamas, Bahrain, Barbados, Belize, Aruba, Bahamas, Bahrain, Barbados, Belize, Botswana, Brazil, Chile, Columbia, Costa Rica, Dominican Republic, Botswana, Brazil, Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, Egypt, El Salvador, Ethopia, Fiji, Guatemala, Haiti, India, Ecuador, Egypt, El Salvador, Ethopia, Fiji, Guatemala, Haiti, India, Indonesia, Jordan, Kenya, Kuwait, Lebanon, Lesotho, Macau, Malawi, Indonesia, Jordan, Kenya, Kuwait, Lebanon, Lesotho, Macau, Malawi, Malta, Mexico, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Malta, Mexico, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Peru, Philippines, Saudi Arabia, Sierra Leone, South Oman, Pakistan, Peru, Philippines, Saudi Arabia, Sierra Leone, South Africa, Sri Lanka, Taiwan, Tanzania, Trinidad and Tobago, Turkey, Africa, Sri Lanka, Taiwan, Tanzania, Trinidad and Tobago, Turkey, Uganda, United Arab Emirates, Uruguay, Zambia, Zimbabwe (51)Uganda, United Arab Emirates, Uruguay, Zambia, Zimbabwe (51)

Developed Economies:Developed Economies: Australia, Austria, Belgium, Canada, Cyprus, Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Israel, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Ireland, Israel, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, United States (27)United States (27)

1414

VariablesVariablesPerformance measures (by monetary goal):Performance measures (by monetary goal): Price stability goal Price stability goal

INFL – annual CPI inflation rate in country i, year t (based INFL – annual CPI inflation rate in country i, year t (based on WDI 2005)on WDI 2005)

ABSINFL – absolute value of annual CPI inflation rate ABSINFL – absolute value of annual CPI inflation rate (WDI)(WDI)

STDDEVNFL – standard deviation of annual CPI inflation STDDEVNFL – standard deviation of annual CPI inflation rate over the previous 3 yearsrate over the previous 3 years

H_MONETARY - an index measuring the success of the H_MONETARY - an index measuring the success of the country’s monetary policy based on the weighted average country’s monetary policy based on the weighted average inflation over the most recent three years and the degree inflation over the most recent three years and the degree to which a country imposes price controls, as determined to which a country imposes price controls, as determined by the Heritage Foundation as part of its Index of by the Heritage Foundation as part of its Index of Economic Freedom (0-100 scale, higher score is better Economic Freedom (0-100 scale, higher score is better performance)performance)

1515

Variables – cont’Variables – cont’ Real output goalReal output goal

RGDPGR – Real GDP growth (WDI)RGDPGR – Real GDP growth (WDI)

STDDEVRGDPGR – Standard deviation of real STDDEVRGDPGR – Standard deviation of real GDP growth over the previous 3 years (WDI)GDP growth over the previous 3 years (WDI)

WSDINFLGDPGR - an equally weighted average WSDINFLGDPGR - an equally weighted average of the standard deviation of annual CPI inflation of the standard deviation of annual CPI inflation over the previous 3 years and the standard over the previous 3 years and the standard deviation of annual real GDP growth over the deviation of annual real GDP growth over the previous 3 years (WDI) previous 3 years (WDI)

1616

Variables – cont’Variables – cont’ Financial stability goalFinancial stability goal

PROBLOAN - problem loan ratio = dollar volume PROBLOAN - problem loan ratio = dollar volume of problem loans as a percent of dollar volume of of problem loans as a percent of dollar volume of total loans (Bankscope database)total loans (Bankscope database)

VAREXRATE – standard deviation of exchange VAREXRATE – standard deviation of exchange rate (IFS Statistics)rate (IFS Statistics)

1717

Variables – cont’Variables – cont’Central bank characteristics:Central bank characteristics: Focus on measures related to governance structure Focus on measures related to governance structure

that could potentially affect the effectiveness of the that could potentially affect the effectiveness of the central bank in achieving its goals as reflected in our central bank in achieving its goals as reflected in our performance measuresperformance measures

INDEPENDENT = 1 if the central bank has autonomy from INDEPENDENT = 1 if the central bank has autonomy from the government in implementing monetary policy, and 0 the government in implementing monetary policy, and 0 otherwise (otherwise (Individual Websites, E-mails, IFS, and Individual Websites, E-mails, IFS, and LiteratureLiterature) )

DIRECTORS – number of directors on the central bank’s DIRECTORS – number of directors on the central bank’s board in country i, time t (board in country i, time t (Morgan Stanley Central Bank Morgan Stanley Central Bank Directory, Individual Websites and E-mails) Directory, Individual Websites and E-mails)

DIRECTORS_DIRS – percentage of outside directors DIRECTORS_DIRS – percentage of outside directors on the central bank’s governing board, country i time t on the central bank’s governing board, country i time t

1818

Variables – cont’Variables – cont’Central bank characteristics – cont’:Central bank characteristics – cont’: GOV_TURNOVER = Average rate of turnover of central GOV_TURNOVER = Average rate of turnover of central

bank governors since 1993, measured as number of un-bank governors since 1993, measured as number of un-served years as percentage of term of the governor served years as percentage of term of the governor divided by total number of governors since 1993 divided by total number of governors since 1993 (Websites and E-mails)(Websites and E-mails)

GOV_TERM_INDET = 1 if the length of the governor’s GOV_TERM_INDET = 1 if the length of the governor’s term in country i in year t is undetermined and 0 otherwise term in country i in year t is undetermined and 0 otherwise (Morgan Stanley Central Bank Directory, Individual (Morgan Stanley Central Bank Directory, Individual Websites and E-mails)Websites and E-mails)

GOV_TERM_DET = 0 if the governor’s term is GOV_TERM_DET = 0 if the governor’s term is undetermined and = number of years in the governor’s undetermined and = number of years in the governor’s term in country i time t otherwise (Morgan Stanley Central term in country i time t otherwise (Morgan Stanley Central Bank Directory, Individual Websites and E-mails)Bank Directory, Individual Websites and E-mails)

SUP_MON = 1 if the central bank has bank supervisory SUP_MON = 1 if the central bank has bank supervisory responsibilities as well as monetary responsibilities, and 0 responsibilities as well as monetary responsibilities, and 0 otherwise otherwise

1919

Variables – cont’Variables – cont’Central bank characteristics – cont’:Central bank characteristics – cont’: AGE – the number of years since the founding of the AGE – the number of years since the founding of the

central bank (Morgan Stanley Central Bank Directory, central bank (Morgan Stanley Central Bank Directory, Individual Central Bank Websites, and Direct Individual Central Bank Websites, and Direct Correspondence via email with the Central Banks) (NOTE: Correspondence via email with the Central Banks) (NOTE: we do not use age in the regressions)we do not use age in the regressions)

2020

Results – descriptive statisticsResults – descriptive statisticsMEANS MEAN DIFFS

Trans Dvlping DvlpedTrans Vs. Dvlping

Trans Vs. Dvlped

Dvlping Vs. Dvlped

INFL 20.01 10.33 2.19 9.69** 17.82*** 8.14***

ABSINFL 20.08 10.52 2.33 9.56** 17.75*** 8.19***

STDDEVINFL 78.42 9.68 0.88 68.75** 77.54** 8.8*

H_MONETARY 49.49 69.85 83.8 −20.36*** −34.32*** −13.95***

RGDPGR 3.77 3.56 3.59 0.21 0.18 −0.03

STDDEVRGDPGR 3.51 2.64 1.27 0.87** 2.24*** 1.37***

WSDINFLGDPGR 40.97 6.28 1.05 34.69** 39.92** 5.23**

PROBLOAN 6.58 5.25 3.82 1.33** 2.76*** 1.43***

VAR_EXRATE 7.10 34.51 5.13 −27.41* 1.97 29.38**

2121

Results – descriptive statistics, cont’Results – descriptive statistics, cont’MEAN MEAN DIFF

Trans Dvlping DvlpedTrans Vs. Dvlping

Trans Vs. Dvlped

Dvlping Vs. Dvlped

DIRECTORS 8.22 7.13 9.48 1.09*** −1.26** −2.35***

OUTSIDEDIRS_DIRS 14.15 27.17 16.63 −13.02*** −2.48 10.54***

FEMALEDIRS_DIRS 12.69 8.07 10.02 −4.62*** −2.66 −1.96

GOV_TERM_INDET 0.052 0.096 0.111 −0.05 −0.06 −0.01

GOV_TERM_DET 5.58 3.94 5.07 2.03*** 0.51** −1.13***

GOV_TURNOVER 0.292 0.288 0.15 0.03 0.14*** 0.14***

INDEPENDENT 0.211 0.077 0.777 0.13*** −0.57*** −0.70***

SUP_MON 0.421 0.31 0.41 0.11** 0.01 −0.10**

AGE 30.63 44.46 119.55 −13.83*** −88.92*** −75.09***

2222

Difference-in-means analysisDifference-in-means analysis

Price stability goalsPrice stability goals: transition economies exhibit the : transition economies exhibit the highest inflation and inflation variability levels, highest inflation and inflation variability levels, whereas developed countries exhibit the lowest levels. whereas developed countries exhibit the lowest levels. Price stability goals were more successfully attained in Price stability goals were more successfully attained in

developed economiesdeveloped economiesGrowth goalsGrowth goals: growth levels are the highest in : growth levels are the highest in transition economies and the lowest in developed transition economies and the lowest in developed countries, but the differences are not significant; countries, but the differences are not significant; developed countries have significantly more stable developed countries have significantly more stable growth. growth. Developed economies were more successful in Developed economies were more successful in

achieving price and output stabilization objectives achieving price and output stabilization objectives

2323

Difference-in-means analysis – cont’Difference-in-means analysis – cont’

Financial stability goalsFinancial stability goals: : Transition economies exhibit the highest rate of Transition economies exhibit the highest rate of

problematic loans while developed countries exhibit the problematic loans while developed countries exhibit the lowest rates, but the rates are fairly low in all regions.lowest rates, but the rates are fairly low in all regions.

Exchange rates were considerably less stable in the Exchange rates were considerably less stable in the developing countries compared with transition and developing countries compared with transition and developed countriesdeveloped countries

2424

Difference-in-means – cont’Difference-in-means – cont’

Central bank characteristicsCentral bank characteristics: : Central banks in developed countries tend to be older, Central banks in developed countries tend to be older,

with greater supervising responsibilities, greater with greater supervising responsibilities, greater independence, and a larger number of directorsindependence, and a larger number of directors

Central banks in developing countries seem to have Central banks in developing countries seem to have more outside directorsmore outside directors

Central banks in transition economies seem to have Central banks in transition economies seem to have more female directorsmore female directors

Central banks in transition and developing economies Central banks in transition and developing economies seem to have a higher governor turnover than those seem to have a higher governor turnover than those in developed countriesin developed countries

2525

Relationship between central bank characteristics Relationship between central bank characteristics and performance differ across country groupsand performance differ across country groups

F-Tests Trans = Dvlping

Trans = Dvlped

Dvlping = Dvlped

Trans = Dvlping= Dvlped

INFL 9.01*** 4.87*** 2.38** 4.90***

STDDEVINFL 7.55*** 6.66*** 0.06 4.34***

ABSINFL 8.91*** 4.80*** 2.45** 4.87***

RGDPGR 2.84*** 3.17*** 0.90 1.96**

STDDEVRGDPGR 4.73*** 4.14*** 0.90 2.88***

WSDINFLGDPGR 6.93*** 6.18*** 0.06 4.08***

H_MONETARY 18.33*** 12.73*** 3.50*** 10.55***

PROBLOAN 0.65 1.03 1.14 0.99

VAR_EXRATE 1.01 0.02 1.65 1.09

2626

Results – Regression analysisResults – Regression analysis

2727

Price stability goal performance Price stability goal performance

In developed countries, a greater number of In developed countries, a greater number of directors is associated with an increase in directors is associated with an increase in inflationinflation Consistent with a large board size hindering Consistent with a large board size hindering

decision and individual accountabilitydecision and individual accountabilityAn undetermined (or long) governor term is An undetermined (or long) governor term is associated with lower inflation associated with lower inflation Consistent with less political dependence and Consistent with less political dependence and

government intervention that might produce government intervention that might produce better inflation resultsbetter inflation results

2828

Price stability goal performance –cont’Price stability goal performance –cont’

Central bank involvement in both supervision Central bank involvement in both supervision and monetary policy might lead to worse inflation and monetary policy might lead to worse inflation outcomes in transition and developed outcomes in transition and developed economies.economies.

Central bank independence appears to be Central bank independence appears to be significantly associated with lower inflation in significantly associated with lower inflation in transition countries and higher inflation in other transition countries and higher inflation in other countries. We find no significant association countries. We find no significant association with inflation volatility. with inflation volatility. Unexpected result, contrary to the received wisdom.Unexpected result, contrary to the received wisdom.

2929

Results – regression cont’Results – regression cont’

3030

Output goal performanceOutput goal performance

The better measure may be the variability of GDP The better measure may be the variability of GDP growth growth Monetary policy cannot affect output level in the long Monetary policy cannot affect output level in the long

runrunBank independence is associated with greater Bank independence is associated with greater growth stabilitygrowth stability This is opposite of what one might expect if there is a This is opposite of what one might expect if there is a

short-run tradeoff between inflation and output short-run tradeoff between inflation and output variability and the government favors stabilizing variability and the government favors stabilizing output rather than inflation. output rather than inflation.

Our results suggest independent central banks do not Our results suggest independent central banks do not act in a way that neglects output stabilization act in a way that neglects output stabilization

3131

Results – regression cont’Results – regression cont’

3232

Financial stabilityFinancial stabilityThere is little significant relationship between central There is little significant relationship between central bank characteristics and the problem loan ratio – the bank characteristics and the problem loan ratio – the adjusted R-squards are very low.adjusted R-squards are very low.

For transition countries, the number of directors is For transition countries, the number of directors is positively related to exchange rate variability, while the positively related to exchange rate variability, while the share of outside directors is negatively related to this share of outside directors is negatively related to this measure measure Combined with previous findings, these results suggest Combined with previous findings, these results suggest

that for transition countries, more directors may not be that for transition countries, more directors may not be helpful to central bank performance, but more outside helpful to central bank performance, but more outside directors might be conducive. directors might be conducive.

3333

Conclusions-1Conclusions-1We ask two simple questions:We ask two simple questions: (1) Is there a significant relationship between (1) Is there a significant relationship between

central bank governance and institutional central bank governance and institutional characteristics and the economic outcomes characteristics and the economic outcomes that reflect performance of central banks?that reflect performance of central banks?

(2) Do these relationships differ across central (2) Do these relationships differ across central banks in operating countries at different stages banks in operating countries at different stages of economic development?of economic development?

3434

Conclusions-2Conclusions-2(1) Is there a significant relationship between central bank (1) Is there a significant relationship between central bank governance and institutional characteristics and the economic governance and institutional characteristics and the economic outcomes that reflect performance of central banks?outcomes that reflect performance of central banks? We do find some significant associations, however, we find We do find some significant associations, however, we find

no strong definitive conclusion that central bank no strong definitive conclusion that central bank organizational structure has strong correlations with organizational structure has strong correlations with economic performance, either positively or negativelyeconomic performance, either positively or negatively..

(2) Do these relationships differ across central banks in (2) Do these relationships differ across central banks in operating countries at different stages of economic operating countries at different stages of economic development?development? WWe find significant differences in the relationship between e find significant differences in the relationship between

performance and central bank governance and performance and central bank governance and organizational characteristics across countries at different organizational characteristics across countries at different stages of economic development.stages of economic development.

3535

Conclusions-3Conclusions-3Central bank independence is not always Central bank independence is not always significantly related to performance and in some significantly related to performance and in some cases in developing and developed countries the cases in developing and developed countries the relationship is the opposite of what one might relationship is the opposite of what one might expect.expect. Independence is not significantly related to inflation Independence is not significantly related to inflation

variabilityvariability In developed countries, independence is significantly In developed countries, independence is significantly

associated with lower output variation and with lower associated with lower output variation and with lower weighted price-and-output variation, but with a higher weighted price-and-output variation, but with a higher inflation level.inflation level.

In developing countries, independence is significantly In developing countries, independence is significantly associated with a higher inflation level.associated with a higher inflation level.

In transition economies, independence is significantly In transition economies, independence is significantly associated with lower output variation and a lower associated with lower output variation and a lower inflation level.inflation level.

3636

Conclusions-4Conclusions-4The size of the board and the percentage of outside The size of the board and the percentage of outside directors on the board do not appear to have a strong directors on the board do not appear to have a strong correlation with performance across our performance correlation with performance across our performance measures. measures.

Central bank involvement in both supervision and Central bank involvement in both supervision and monetary policy might lead to worse inflation outcomes in monetary policy might lead to worse inflation outcomes in transition and developed economiestransition and developed economies

3737

Conclusions-5Conclusions-5Caution in interpretation:Caution in interpretation: Preliminary results – still collecting dataPreliminary results – still collecting data Relatively short time frame in our sampleRelatively short time frame in our sample

So lack of strong significance could merely reflect the lack of a So lack of strong significance could merely reflect the lack of a long enough time frame over which there was been enough long enough time frame over which there was been enough variation in economic outcomes. variation in economic outcomes. Or could provide an explanation of Lybek and Morris’s (2004) Or could provide an explanation of Lybek and Morris’s (2004) finding that there is little consensus among central banks finding that there is little consensus among central banks regarding the structure, size, and composition of their regarding the structure, size, and composition of their governing bodies.governing bodies.

Several of the associations we find are sufficiently Several of the associations we find are sufficiently surprising as to merit further exploration.surprising as to merit further exploration.