Governing Macro Prudential Policy: Do Central Bankers Do it Better?

37 Pages Posted: 1 Apr 2014 Last revised: 17 Apr 2014

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics; Bocconi University - Department of Economics (ECO)

Alessio Volpicella

Queen Mary University of London, School of Economics and Finance; Queen Mary University of London, School of Economics and Finance

Date Written: March 1, 2014

Abstract

This paper offers a positive analysis of the relationships between macro prudential policy, micro supervision and central banking, presenting two contributions. Starting from the review of the recent theoretical models, which take the issue of the central bank involvement in macro supervision, it has been discovered that one relevant topic is missed: the political economy of the macro supervisory architecture. Here a principal agent model is used to design a political economy framework, which explains how the politicians can shape the central bank governance in addressing financial systemic risks, taking into account both the social and political pros and cons in having a central bank more or less involved in macro supervision. The framework is used to empirically analyse the present settings in 31 countries. We find that central banks in charge of banking micro supervision are likely to get macro prudential powers; on top the same is true the more the central banker is politically dependent. From the point of view of the politicians on the one side the more the central bank already acting as banking micro supervisor, the smaller will be the risk that its involvement in macro supervision will produce negative spillover effects; on the other side the political dependence may represent the commitment devise to mitigate the fear of the politicians to face an over powerful central bank.

Keywords: Macro Prudential Supervision, Central Bank Independence, Micro Supervision, Political Economy

JEL Classification: E58, E63, G18

Suggested Citation

Masciandaro, Donato and Volpicella, Alessio and Volpicella, Alessio, Governing Macro Prudential Policy: Do Central Bankers Do it Better? (March 1, 2014). Baffi Center Research Paper No. 2014-153, Available at SSRN: https://ssrn.com/abstract=2418194 or http://dx.doi.org/10.2139/ssrn.2418194

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Economics (ECO) ( email )

Via Gobbi 5
Milan, 20136
Italy

Alessio Volpicella

Queen Mary University of London, School of Economics and Finance ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Queen Mary University of London, School of Economics and Finance ( email )

Mile End Road
Graduate Center
London, London E14NS
United Kingdom

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