WHAT IS CENTRAL ABOUT CENTRAL BANKING?: A STUDY OF INTERNATIONAL MODELS HEARING BEFORE THE SUBCOMMITTEE ON MONETARY POLICY AND TRADE OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION NOVEMBER 13, 2013 Printed for the use of the Committee on Financial Services Serial No. 113–50 ( U.S. GOVERNMENT PRINTING OFFICE 86–685 PDF WASHINGTON : 2014 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\86685.TXT TERRI HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman GARY G. MILLER, California, Vice Chairman MAXINE WATERS, California, Ranking SPENCER BACHUS, Alabama, Chairman Member Emeritus CAROLYN B. MALONEY, New York PETER T. KING, New York NYDIA M. VELA´ ZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California SHELLEY MOORE CAPITO, West Virginia GREGORY W. MEEKS, New York SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts RANDY NEUGEBAUER, Texas RUBE´ N HINOJOSA, Texas PATRICK T. MCHENRY, North Carolina WM. LACY CLAY, Missouri JOHN CAMPBELL, California CAROLYN MCCARTHY, New York MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts KEVIN McCARTHY, California DAVID SCOTT, Georgia STEVAN PEARCE, New Mexico AL GREEN, Texas BILL POSEY, Florida EMANUEL CLEAVER, Missouri MICHAEL G. FITZPATRICK, Pennsylvania GWEN MOORE, Wisconsin LYNN A. WESTMORELAND, Georgia KEITH ELLISON, Minnesota BLAINE LUETKEMEYER, Missouri ED PERLMUTTER, Colorado BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan ROBERT HURT, Virginia JOHN C. CARNEY, JR., Delaware MICHAEL G. GRIMM, New York TERRI A. SEWELL, Alabama STEVE STIVERS, Ohio BILL FOSTER, Illinois STEPHEN LEE FINCHER, Tennessee DANIEL T. KILDEE, Michigan MARLIN A. STUTZMAN, Indiana PATRICK MURPHY, Florida MICK MULVANEY, South Carolina JOHN K. DELANEY, Maryland RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona DENNIS A. ROSS, Florida JOYCE BEATTY, Ohio ROBERT PITTENGER, North Carolina DENNY HECK, Washington ANN WAGNER, Missouri ANDY BARR, Kentucky TOM COTTON, Arkansas KEITH J. ROTHFUS, Pennsylvania SHANNON MCGAHN, Staff Director JAMES H. CLINGER, Chief Counsel (II) VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\86685.TXT TERRI SUBCOMMITTEE ON MONETARY POLICY AND TRADE JOHN CAMPBELL, California, Chairman BILL HUIZENGA, Michigan, Vice Chairman WM. LACY CLAY, Missouri, Ranking FRANK D. LUCAS, Oklahoma Member STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin BILL POSEY, Florida GARY C. PETERS, Michigan MICHAEL G. GRIMM, New York ED PERLMUTTER, Colorado STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois MARLIN A. STUTZMAN, Indiana JOHN C. CARNEY, JR., Delaware MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama ROBERT PITTENGER, North Carolina DANIEL T. KILDEE, Michigan TOM COTTON, Arkansas PATRICK MURPHY, Florida (III) VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\86685.TXT TERRI VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\86685.TXT TERRI C O N T E N T S Page Hearing held on: November 13, 2013 ........................................................................................... 1 Appendix: November 13, 2013 ........................................................................................... 35 WITNESSES WEDNESDAY, NOVEMBER 13, 2013 Lachman, Desmond, Resident Fellow, American Enterprise Institute ............... 5 Makin, John H., Resident Scholar, American Enterprise Institute .................... 8 Orphanides, Athanasios, Professor, Practice of Global Economics and Manage- ment, Sloan School of Management, Massachusetts Institute of Technology . 7 Posen, Adam S., President, Peterson Institute for International Economics ..... 10 APPENDIX Prepared statements: Lachman, Desmond .......................................................................................... 36 Makin, John H. ................................................................................................. 49 Orphanides, Athanasios ................................................................................... 62 Posen, Adam S. ................................................................................................. 68 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Huizenga, Hon. Bill: Wall Street Journal article entitled, ‘‘ECB’s Praet: All Options on Table,’’ dated November 13, 2013 ............................................................................. 79 Written statement of Lawrence Lindsey ........................................................ 82 Wall Street Journal article entitled, ‘‘Andrew Huszar: Confessions of a Quantitative Easer,’’ dated November 11, 2103 ......................................... 98 (V) VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\86685.TXT TERRI VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 K:\DOCS\86685.TXT TERRI WHAT IS CENTRAL ABOUT CENTRAL BANKING?: A STUDY OF INTERNATIONAL MODELS Wednesday, November 13, 2013 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MONETARY POLICY AND TRADE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to notice, at 2:27 p.m., in room 2128, Rayburn House Office Building, Hon. Bill Huizenga [vice chairman of the subcommittee] presiding. Members present: Representatives Huizenga, Pearce, Posey, Fincher, Stutzman, Mulvaney, Pittenger, Cotton; Clay, Perlmutter, Carney, and Kildee. Ex officio present: Representative Hensarling. Mr. HUIZENGA [presiding]. The subcommittee will come to order. And without objection, the Chair is authorized to declare a recess of the subcommittee at any time. It appears that we will be having votes somewhere around 4:15 or 4:30, is the indication that we have. So with that, we are going to get moving, because we have a lot of very interesting stuff ahead of us as a committee today. And the Chair is going to recognize himself for 5 minutes for the purpose of an opening statement. So we have to ask ourselves, what is central about central bank- ing? What works? What doesn’t? What thinking went into forming the European Central Bank 80 years after the formation of our own Federal Reserve and how has it lived up to expectations so far? Did it perform better or worse among its peer institutions in the wake of the financial crisis? It is these questions and others that our committee is interested in exploring as we consider potential reforms of our own Federal Reserve System, which is posting its 100th anniversary this year. This afternoon, we welcome our witnesses: Dr. Desmond Lachman from the American Enterprise Institute; Dr. Athanasios Orphanides from the Massachusetts Institute of Technology; Dr. John Makin from the American Enterprise Institute as well; and Dr. Adam Posen from the Peterson Institute for International Eco- nomics. Gentlemen, thank you very much for being here today. We appre- ciate your time. (1) VerDate Nov 24 2008 16:55 Apr 17, 2014 Jkt 086685 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\86685.TXT TERRI 2 Today’s hearing will examine the central banks of the other ad- vanced economies around the world, focusing on their governance and policy tools, as well as their successes and failures in imple- menting monetary policy. The Federal Reserve prides itself on being an independent cen- tral bank here in the United States. However, independence is hard to measure and even more difficult to demonstrate. The ap- pointment process of policymakers, reporting requirements, and policy review processes all play a role in defining the relationship that central banks have with their own national governments. Even still, the most independent central banks are ones where there is very little coordination or interference by fiscal policy deci- sions. In 2009, the Bank of International Settlements (BIS) surveyed 41 central banks and reported on both the broad commonalities in the structures and roles of these institutions as well as the differences among them. The BIS reported that all the central banks it sur- veyed have full or partial responsibility for monetary policy. Over half are given policy objectives, usually specified in domestic law or international treaty, but some policy objectives come by published statements that do not have the force of law. Many have either a ‘‘single mandate’’ of pricing stability or a primary goal of price sta- bility with secondary macroeconomic objectives. The United States and Canada are the only two countries identified as having a price stability mandate equally weighted with other macroeconomic ob- jectives. I think this dual mandate is what we will be discussing quite a bit. Nearly all central banks have full responsibility for for- mulating and implementing monetary policy. Specifically, we will explore today international models of central banking. Some central bank models, like our own U.S. Federal Re- serve System, have a ‘‘dual mandate’’ of enacting monetary policy with a goal of maximizing employment while simultaneously mini- mizing inflation. Other countries’ central banks work under a more focused or prioritized mandate