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THE EFFECT OF FINANCIAL REGULATION MANDATE ON INFLATION BIAS: A DYNAMIC PANEL APPROACH

Lazopoulos, I, Lima, D and Gabriel, V (2016) THE EFFECT OF FINANCIAL REGULATION MANDATE ON INFLATION BIAS: A DYNAMIC PANEL APPROACH [Working Paper]

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Abstract

Central banks in charge of banking regulation are less aggressive in their inflation mandate since tight monetary policy conditions could have an adverse effect on the stability of the banking system. Due to the conflict between the two mandates, it has been argued that banking supervisory powers should be assigned to an independent authority to avoid inflation bias and enhance social welfare. The first part of the paper develops a theoretical model to examine the interaction between the credit and bank’s balance sheet policy transmission channels in influencing macroeconomic outcomes. When mandates are combined to a single authority, price and financial stabilisation objectives can be complementary or conflicting, depending on the policy instruments and types of macroeconomic shocks, with an important impact on social welfare. The second part of the paper empirically assesses whether central banks’ combined mandates leads to an inflation bias problem using panel data for 25 industrialised countries from 1975 to 2007. The estimation results show that, once we control for relevant policy and institutional factors (such as the presence of inflation targeting and deposit insurance schemes), the separation of banking supervision and monetary policy does not have a significant effect on inflation outcomes.

Item Type: Working Paper
Subjects : Economics
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
AuthorsEmailORCID
Lazopoulos, IUNSPECIFIEDUNSPECIFIED
Lima, DUNSPECIFIEDUNSPECIFIED
Gabriel, VUNSPECIFIEDUNSPECIFIED
Date : 8 April 2016
Copyright Disclaimer : Copyright 2016 The Authors
Uncontrolled Keywords : Monetary policy, banking regulation, institutional mandates.
Related URLs :
Depositing User : Symplectic Elements
Date Deposited : 23 Aug 2016 15:23
Last Modified : 23 Aug 2016 15:23
URI: http://epubs.surrey.ac.uk/id/eprint/811456

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