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Does competence of central bank governors influence financial stability?

Ozili, Peterson K (2020): Does competence of central bank governors influence financial stability? Forthcoming in:

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Abstract

This study investigates whether the competence of central bank governors affect the stability of the financial system they are responsible for. Using publicly available information about central bank governors from 2000 to 2016 together with data on financial stability and the macro-economy, the findings reveal that central bank governors’ competence promotes financial stability, depending on how competence is measured. Specifically, the findings reveal that the financial system is more stable when the central bank governor is older and male. The financial system is also stable during the tenure of a central bank governor that has a combination of cognitive ability, social capital and technical competence in economics. The gender analyses reveal that the financial system is also stable during the tenure of a female central bank governor that has high social capital or high cognitive abilities while the financial system is relatively less stable during the tenure of a male central bank governor that has high social capital or high cognitive abilities. Comparing developed countries to developing and transition countries, the findings reveal that the financial system of developed countries is more stable during the tenure of a central bank governor that has high cognitive ability, social capital and technical competence in economics while the financial system of developing and transition countries is less stable during the tenure of a central bank governor that has high cognitive ability, social capital and technical competence in economics. Also, there is evidence that the financial system of developing and transition countries is more stable during the tenure of a central bank governor that has knowledge in disciplines other than economics. The findings are consistent with the view that certain characteristics of central bankers shape their beliefs, preferences and choice of policy, which in turn, are consequential for policy outcomes during their tenure.

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