CENTRAL BANK INDEPENDENCE

Central Bank Independence, With Relation To The Current Stock Market Crisis, Inflation, Exchange Rate Control Us$ Vs Other Currencies, Overall Effect On Economy



Table of Contents

Chapter 1: Introduction3

Chapter 2: Literature Review5

Exchange rate regimes under the constraints of globalization and financial instability10

Soft pegging11

Hard pegs13

Flexible exchange rates14

Monetary policy strategies under globalization15

Is inflation targeting a solution/shield to the financial instability problem?15

Is there a(n additional) need for asset price targeting?17

Monetary policy goals under globalization20

Does globalization reduce inflation?20

Increase in competition20

Effects on inflation22

Chapter 3: Methodology25

Research Design25

Literature Search25

Keywords25

Chapter 4: Results & Discussion27

Trade-offs27

Credibility trap28

Uncertainty29

Potential dangers of deflation31

Chapter 5 Conclusions34

References37

Chapter 1: Introduction

The debate over globalization has been lively and passionate over the past years, and it has been associated with high emotions and sometimes even violent conflicts. However, “globalization” is a vague term under which the ongoing trend toward a deeply integrated world economy with all its economic, technological, political and cultural dimensions has been subsumed.

In economics, real (non-monetary) aspects or implications of globalization (with respect to international trade, income/wealth distribution, growth, employment, and environment) have largely dominated the discussion during most of the 1990s (see IMF, 1997; Wagner, 2000; Masson, 2001; Bourguignon et al., 2002; World Bank, 2002)[1]. Only in the late 1990s, after the Asian crisis, the discussion on monetary aspects or implications of globalization has developed on a broader scale (Wagner (2000c); early publications were Romer, 1993; Bernanke et al., 1998; Issing, 1996; Lane, 1997). Then in particular, the implications on optimal exchange rate regimes and on financial stability have been discussed (Frankel, 1999; Eichengreen, 1999), whereas monetary policy implications in the narrower sense have become a popular topic of research only in very recent years (Friedman, 1999; Wagner, 2002a, b, c, 2003).

This paper will mainly focus on this monetary aspect of globalization. Section 2 will deal with the implications of globalization for the choice of an appropriate (or optimal) exchange rate regime. Briefly after the Asian crisis, the current mainstream view in international macroeconomics arose arguing that only so-called “corner solutions” could avoid the reappearance of such financial and currency crises in the emerging markets. The following theoretical and empirical research, however, has shown that, on the one hand, there apparently are institutional hindrances to credible hard pegging (currency boards or dollarization), and, on the other hand, there obviously is a systematic “fear of floating”. Therefore, in the search for other or supplementary institutional solutions of the inherent problem of financial instability caused by globalization, the need of a “credible” nominal anchor soon moved into the centre of discussion. Section 3 discusses different strategic aspects of monetary policy in the light of globalization. Section 3.1 delineates the current main proposal of an appropriate nominal anchor for developed as well as emerging market economies, namely inflation targeting. Looking at the Japanese crisis, however, it has argued that price stability is not a sufficient condition for financial stability. Therefore, the discussion on asset price targeting has gained much attention in the very recent years. Section 3.2 investigates the proposal of implementing asset price targeting in monetary ...