Abstract
The paper discusses key elements of optimal central bank design and applies its findings to the Eurosystem. A particular focus is on the size of monetary policy committees, the degree of centralization, and the representation of relative economic size in the voting rights of regional (or sectoral) interests. Broad benchmarks for the optimal design of monetary policy committees are derived, combining relevant theoretical arguments with available empirical evidence. A new indicator compares the mismatch of relative regional economic size and voting rights in the monetary policy committees of the US Fed, the pre-1999 German Bundesbank, and the ECB over time. Based on these benchmarks, there seems to be room to improve the organization of the ECB Governing Board and current plans for reform.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Aksoy, Y., de Grauwe, P., & Dewachter, H. (2002). Do asymmetries matter for European monetary policy? European Economic Review, 46(3), 443–469.
Alesina, A., & Spolaore, E. (2003). The size of nations. Cambridge, Massachusetts: MIT.
Baldwin, Richard (2001). The ECB's Number Problems, Financial Times (London), December 4.
Baldwin, R., Berglöf, E., Giavazzi, F., & Widgren, M. (2001). Preparing the ECB for Enlargement, CEPR Policy Paper, 6. London: CEPR.
Barber, T. (2001). Casting Light on the ECB, Financial Times Online (London), September 6.
Benigno, P. (2004). Optimal monetary policy in a currency area. Journal of International Economics, 63(2), 293–320.
Berger, H. (1997). The Bundesbank's path to independence. Evidence from the 1950's. Public Choice, 93, 427–453.
Berger, Helge (2002). The ECB and Euro-area enlargement. IMF Working Paper, 02/175.
Berger, H., & de Haan, J. (2002). Are small countries too powerful within the ECB? Atlantic Economic Journal, 30(3), 1–20.
Berger, H., & Müller, T. (2004). How should large and small countries be represented in a currency union? CESifo Working Paper, 1344.
Berger, H., de Haan, J., & Inklaar, R. (2004). Restructuring the ECB. In H. Berger & T. Moutos (Eds.), Managing EU enlargement (pp. 29–66). MIT: Cambridge.
Berger, H., Eijffinger, S., & de Haan, J. (2001). Central Bank independence: an update of theory and evidence. Journal of Economic Surveys, 15(1), 3–40.
Berk, J. M., & Bierut, B. K. (2004). The effects of learning in interactive monetary policy committees. Netherlands Central Bank, MEB Series, 2004-01.
Bindseil, U. (2001). A coalition-form analysis of the “One country-one vote” rule in the governing council of the European Central Bank. International Economic Journal, 15(1), 141–164.
Blinder, A. (1998). Central banking in theory and practice. Cambridge, Massachusetts: MIT.
Blinder, A., & Morgan, J. (2005). Are two heads better than one? Monetary policy by committee. Journal of Money, Credit and Banking, 37(5), 798–811.
Blinder, A., & Wyplosz, C. (2004). Central bank talk: Committee structure and communication policy, Mimeo, Princeton and Graduate Institute of International Studies.
Bullard, J., & Waller, C. (2004). Central bank design in general equilibrium. Journal of Money, Credit, and Banking, 36(1), 95–113.
Bundesbank (1992). Restructuring the Bundesbank, Monthly Report, August, 48–53.
Chappell, H., McGregor, R. R., & Vermilyea, T. (2005). Committee decisions on monetary policy, evidence from historical records of the federal open market committee. Cambridge, Massachusetts: MIT.
Dvorsky, S., & Lindner, I. (2003). Institutionelle Entwicklungen im ESZB. Anpassung der Stimmrechtsmodalitäten im EZB-Rat, Österreichische Nationalbank, Berichte und Studien, 2, 144–159.
Eichengreen, B. (1992). Designing a central bank for Europe: a cautionary tale from the early years of the federal reserve system. In M. Canzoneri, V. Grilli, & P. Masson (Eds.), Establishing a central bank: issues in Europe and lessons from the US (pp. 13–40). Cambridge: Cambridge University Press.
European Central Bank (ECB) (1999, July). The Institutional Framework of the European System of Central Banks, Monthly Bulletin, 55–63.
European Central Bank (ECB) (2003, May). The Adjustment of Voting Modalities in the Governing Council, Monthly Bulletin, 73–83.
European Union (1997). Consolidated version of the treaty establishing the European community. Official Journal of the European Communities, C 340, November 10.
Fahrholz, C., & Mohl, P. (2004). EMU-enlargement and the reshaping of decision-making within the ECB governing council: a voting-power analysis. Ezoneplus Working Paper, 23.
Faust, J., & Henderson, D. (2004). Is inflation targeting best-practice monetary policy? Federal Reserve Bank of St. Louis Review, 86(4), 117–143.
Frey, R. (2004). Welfare Implications of the Design of a Currency Union in Case of Member Countries of Different Sizes and Output Persistence, Deutsche Bundesbank Discussion Paper, Series 1, 15/2004 (forthcoming in: Kredit und Kapital).
Friedman, M., & Schwartz, A. (1963). A Monetary History of the United States 1967–1960. Princeton: Princeton University Press.
Fry, M., Julius, D., Mahadewa, L., Roger, S., & Sterne, G. (2000). Key issues in the choice of monetary policy framework. In Lavan Mahadeva, & Gabriel Sterne (Eds.), Monetary Frameworks in a Global Context (pp. 1–216). London: Routledge.
Fujiki, H. (2005 October). The monetary policy committee and the incentive problem: A selective survey, monetary and economic studies, 37–82.
Gerlach-Kristen, P. (2002). Monetary policy committees and interest-rate setting. European Economic Review, 50(2), 487–507.
Gerling, K., Grüner, H. P., Kiel, A., & Schulte, E. (2005). Information acquisition and decision making in committees: A survey. European Journal of Political Economy, 21(3), 563–597.
Gersbach, H., & Hahn, V. (2001). Voting Transparency and Conflicting Interests in Central-Bank Councils, Mimeo, University of Heidelberg.
Gersbach, H., & Pachl, B. (2004). Flexible rules for central banks, Mimeo, University of Heidelberg.
Giannone, D., & Reichlin, L. (2005). Trends and cycles in the Euro area: how much heterogeneity and should we worry about it? Mimeo, Universite' Libre de Bruxelles.
Goodfriend, M. (2000). The role of a regional bank in a system of central banks. Federal Reserve Bank of Richmond Economic Quarterly, Winter, 7–25.
Gros, D., & Hefeker, C. (2002). One size must fit all: National divergences in a monetary union. German Economic Review, 3(3), 247–262.
de Haan, J., Berger, H., & Inklaar, R. (2004). Is the ECB too decentralized? In Hans-Werner Sinn, Mika Widgren, & Marko Köthenburger (Eds.), European Monetary Integration (pp. 71–97). MIT: Cambridge.
von Hagen, J., & Brückner, M. (2001). Monetary Policy in Unknown Territory, The European Central Bank in the Early Years, ZEI Discussion Paper, B18.
von Hagen, J., & Süppel, R. (1994). Central bank constitutions for federal monetary unions. European Economic Review, 38, 774–782.
Hallerberg, M. (2002). Veto Players and Monetary Commitment Technologies. International Organization, 56(4), 775–802.
Havrilevsky, T., & Gildea, J. (1995). The Bias of Federal Reserve Presidents, Economic Inquiry, 33, 274–284.
Hefeker, C. (2002). Monetary policy in a union of 27: Enlargement and reform options. Intereconomics, November/December, 315–20.
Hefeker, C. (2003). Federal monetary policy. Scandinavian Journal of Economics, 105, 641–659.
Heinemann, F., & Huefner, F. (2004). Is the view from the eurotower purely European? National divergence and ECB interest rate policy. Scottish Journal of Political Economy, 51(4), 544–558.
Heisenberg, D. (2003). Cutting the bank down to size: Efficient and legitimate decision-making in the European Central Bank after enlargement. Journal of Common Market Studies, 41(3), 397–420.
Herrendorf, B., & Neumann, M. (2003). The political economy of inflation, labour market distortions and central bank independence. Economic Journal, 113, 43–64.
Linder, I. (2006). The Austrian experience with institutional changes in the European integration process. Typescript.
Lindner, A. (2000). Long-term appointment of central bankers: Cost and benefits, European Journal of Political Economy, 16, 639–654.
Lohmann, S. (1997). Partisan control of the money supply and decentralized appointment powers. European Journal of Political Economy, 13, 225–246.
Lohmann, S. (1998). Federalism and central bank independence: the politics of German monetary policy. World Politics, 50, 401–446.
Lombardelli, C., Proudman, J., & Talbot, J. (2005). Committees versus individuals: an experimental analysis of monetary policy decision making. International Journal of Central Banking, 1(1), 181–205.
Lybeck, T., & Morris, J.A. (2004). Central bank Governance: A Survey of Boards and Arrangements, IMF Working Paper, 04/226.
Maier, P., Bierut, B., & Berben, R.-P. (2003). The Role of Regional Information in the Optimal Composition of a Committee, MEB Discussion Paper (De Nederlandsche Bank), 2003-08.
Meade, E. (2003). A (Critical) Appraisal of the ECB's Voting Reform, Intereconomics–Review of European Economic Policy, 38(3), 129–131.
Meade E., & Sheets, N. (2005). Regional influences on FOMC voting patterns. Journal of Money, Credit and Banking, 37(4), 661–677.
Meade, E., & Sheets, N. (2006). Documenting FOMC Voting Patterns, Typescript.
Meltzer, A. (2003). A history of the federal reserve, Volume I: 1913–1951, The University of Chicago: Chicago, Illinois.
Mirzoev, T. (2004). Limited commitment, inaction and optimal monetary policy. Typescript, Ohio State University.
Moser, P. (1999). Checks and balances, and the supply of central bank independence. European Economic Review, 43, 1569–1593.
Riboni, A., & Ruge-Murcia, F. (2006). The Dynamic (In)efficiency of Monetary Policy by Committee, Typescript, University of Montreal.
Rose, A. (2005). Size really doesn't matter: In search of a national scale effect. Mimeo, University of California, Berkeley.
Servais, D. (2006). The future voting modalities of the ECB governing council. Typescript.
Sibert, A. (2006). Central Banking by Committee, DNB Working Paper, 91.
The Economist (1998). Euro Towers or Fawlty Towers?, 31 October, 1998.
Thygesen, N. (1989). Decentralization and accountability within the central bank: Any lessons from the US experience for the potential organization of a European Central Banking institution? In Paul de Grauwe, & Theo Peeters (Eds.), The ECU and European monetary integration (pp. 91–114). London: MacMillan.
Tootell, G. (1991). Regional conditions and the FOMC votes of district presidents. New England Economic Review, 3–16.
Waller, Christopher (1989). Macroeconomic policy games and central bank politics. Journal of Money, Credit and Banking, 21, 422–431.
Waller, C. (1992). A bargaining model of partisan appointments to the central bank. Journal of Monetary Economics, 29, 411–428.
Waller, C. (2002). Policy boards and policy smoothing. Quarterly Journal of Economics, 115, 305–339.
Waller, C., & Walsh, C. (1996). Central bank independence, economic behavior, and optimal term length. American Economic Review, 85(5), 1139–1154.
Woodford, Michael (2003). Interest & prices: foundations of a theory of monetary policy. Princeton: Princeton University Press.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Berger, H. Optimal central bank design: Benchmarks for the ECB. Rev Int Org 1, 207–235 (2006). https://doi.org/10.1007/s11558-006-8344-8
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11558-006-8344-8