Bank of Italy

The Bank of Italy is the central bank of the Italian Republic, instituted in 1893. The origins and the evolution of the Italian monetary system are, in several respects, pecu- liar. After national unification in 1861, Italy adopted a single currency, the Italian lira. Nevertheless, banknote circulation was fragmented owing to the persistence of strong regional interests (Polsi, 1993): a provision of 1874 recognized six banks of issue, all of which were already performing this function in the pre-unification states.

The resumption of convertibility in 1883 and the building boom triggered by the new national capital, Rome, kindled a large credit expansion, which inflated a real-estate bubble. Most major banks were engaged in generous credit to the building sector, favored by the regulatory vacuum in which they operated (see Fratianni and Spinelli, 1997). The burst of the bubble resulted in a banking crisis, which erupted into a true political and judicial scandal in 1892, when the unsustainable position of Italian banks of issue, and evidence of serious irregularities committed by one of them, the Roman Bank, became public. The scandal highlighted the need to put a limit on banknote issues and to foster the transition towards a single bank of issue (De Cecco, 1990). The Bank of Italy was then instituted by the Banking Law of 10 August 1893 through the merger of three existing banks of issue: the National Bank of the Italian Kingdom, the Tuscan National Bank, and the Tuscan Credit Bank.

Bank of Canada

The Bank of Canada has received many accolades in recent years because of its handling of the financial crisis, especially owing to the popularity of its governor at the time, Mark Carney, who was also appointed chairman of the G20's Financial Stability Board in 2011 and then, in 2013, he became Governor of the Bank of England. As far as central banking internationally is concerned, the Bank of Canada exerts much more prominence among central banks than it would otherwise do when measured simply by the size and importance of the macroeconomy that the Bank oversees through its activities. The Bank of Canada has acquired high credibility also because it has managed a solid and sophisticated banking system, which did not face the same difficulties that plagued the US banking sector during the financial crisis that erupted in 2008.

Much like the US Federal Reserve (Fed), this central bank was founded following major financial crises on the North American continent during the early decades of the twentieth century, namely after the crisis of 1907 for the US Fed and the Great Crash of 1929 for the Bank of Canada (see Lavoie and Seccareccia, 2013). In stark contrast to the Fed, which established a "decentralized" central banking system in 1913 with 12 separate reserve districts, the institutional structure of the Bank of Canada was modelled on the more centralized organization of the Bank of England, with this structure being adapted to the Canadian context following its founding in 1934, for instance in terms of its regional and linguistic representation on its board of directors and governing council. Hence, while first a private institution, the Bank of Canada was quickly nationalized by the federal government within a few years of its creation in 1938 (see Plumptre, 1940; Bank of Canada, 2014).

Banque de France

The Banque de France (BdF) was established in 1800, under the aegis of bankers and Napoleon Bonaparte, who was then First Consul of France. At that time, a few promi- nent bankers were advocating the creation of a private bank of issue, independent of political powers, in order to face up to a state of deflation and lack of cash in the French economy. Bonaparte, who was striving to consolidate public finances and restore mon- etary stability in the aftermath of the French Revolution, agreed to provide public funds to the BdF: he regarded the BdF as a tool for fulfilling his objectives. In 1803, he passed a law in order to provide it with an official charter, which notably endowed it with the exclusive right to issue banknotes in Paris for a period of 15 years. Shortly thereafter, the BdF experienced a bank run owing to the issuance of large amounts of banknotes to finance public spending that eroded public confidence in banknotes. In response, in 1806, Napoleon decided to monitor a reform designed to allow him to exert better control over the BdF's activities. This reform, which was complemented in 1808 with an impe- rial decree providing for the "basic statutes" of the BdF and for the creation of discount offices in main French cities, promoted a relatively balanced power relationship between the State and private shareholders, which was to run until 1936. During that period, the BdF's right to issue banknotes was extended and the network of its discount offices expanded. To deal with the financial crisis that arose from the 1848 Revolution and later from the Franco-Prussian war (1870) and the First World War (1914), the BdF's notes became fiat money for some time. They became fiat money for good in 1936. Legal tender was first experimented with in the 1848-50 and 1870-75 periods, before being definitively enforced in 1875.

Bank of England

The Bank of England (BoE) was founded in 1694 as the government's banker and debt manager. There have been a number of key moments in the BoE's history. In 1781 the renewal of its charter was described as "the public exchequer". The 1844 Bank Charter Act gave the BoE the sole monetary authority in the United Kingdom and tied its note issue to the BoE's gold reserves. Later in the nineteenth century the BoE took on the role of lender of last resort. In 1946 the BoE was nationalized and remained the HM Treasury's adviser, agent, and debt manager. Operational independence was granted to the BoE in May 1997, whereby it undertook the responsibility of monetary policy while public debt management was transferred to HM Treasury and its regulatory functions were passed to the then newly established Financial Services Authority (FSA). The Financial Services Act of 2012 created new regulatory reforms for the BoE whereby an independent prudential regulator was established, the Financial Policy Committee (FPC), as a subsidiary of the Bank. The Prudential Regulatory Authority (PRA) was also created and is responsible for the prudential regulation and supervision of banks, building societies, insurers, and major investment firms. The reforms came into effect on 1 April 2013, with the FSA becoming the two separate regulatory authorities just mentioned.

In September 1992 the UK was forced out of the European Exchange Rate Mechanism. In October 1992 an inflation targeting regime was introduced. In May 1997 that regime was changed to a new one, which was more in line with the policy implications of what has come to be known as the New Consensus Macroeconomics (see, for example, Arestis, 2007). I explain the two regimes in what follows, before I turn to more recent devel- opments as a result of the August 2007 subprime crisis and the Great Recession that followed.

Bank of Japan

By virtue of the National Bank Act of 1872 (amended in 1876), the Japanese government allowed national banks to issue their own banknotes. The Bank of Japan, established as the central bank in 1882 by the Bank of Japan Act, started issuing its own banknotes in 1885, which were convertible to silver (and later to gold) by the Convertible Bank Note Regulations (1884), at which point national banks lost their ability to issue their own banknotes, although their banknotes continued to be used until 1899. The Bank of Japan was originally under the direction of the Ministry of Finance and therefore had little role in the regulation and supervision of the financial system. In 1897, Japan joined the gold standard, but in the end broke away in 1931. Japan gradually moved to a managed currency system, and in 1941 the specie reserve system was abolished. In 1942, the Bank of Japan Act was revised, but the Bank was still under the Ministry of Finance. The Bank of Japan Act was drastically amended in June 1997 and was enforced in April 1998 (see Schiffer, 1962; Tamaki, 1995; Cargill et al., 1997; Tsutsui, 1999).

Exchange-rate pass-through

Policy makers define exchange-rate regimes in agreement with monetary policy. As Vernengo and Rochon (2000, p. 77) point out, "preferences over a specific exchange rate regime can be linked to macroeconomic policy, in particular to whether econo- mists prefer full-employment policies or whether they defend policies aimed at guar- anteeing price stability". As several countries are adopting flexible exchange rates to prevent chronic deficits in their balance of payment (many countries were forced by speculative attacks on their national currencies to abandon fixed exchange-rate regimes), understanding the pass-through effect - the effect of exchange-rate fluctuations on the rate of inflation - became crucial as well as controversial. Many central bankers, adopt- ing mainstream recipes, are targeting inflation in order to avoid the pass-through effect, considering that exchange-rate devaluations have had substantial impacts on domestic prices. In many cases, policy makers have focused primarily on price stability, leaving aside full-employment policies.

Financial supervision

Financial supervision is a basic tenet of a resilient financial system. Supervising the various components that make up the financial system - to wit, financial institutions, markets, and infrastructures - is indeed a critical precondition for the implementation of a consistent framework for financial regulation aimed at enhancing the resilience of the financial system as a whole. Against this backdrop, financial supervision and financial regulation are intimately related. Beyond identifying and assessing emerging risk to financial stability stemming from the macroeconomic and financial environment (through macro stress tests, for instance), supervisory authorities must continuously monitor that the regulatory framework in place provides an even playing field for finan- cial institutions and that, accordingly, it does not prompt the latter to shift their activities to other less or non-regulated segments of the financial system (the so-called "boundary problem in financial regulation"; see Goodhart, 2008, pp. 48-50).