October 19, 2020

Booth Professors Analyze Conflicts of Interest in Central Banks’ Research

Saieh Hall for Economics

Courtesy of UChicago

Research published by central banks is more likely to emphasize the positive effects of quantitative easing on output and inflation—and the central bank economists who publish reports on the efficacy of quantitative easing have better career outcomes, according to a new study.

Central banks are governmental bodies tasked with managing monetary policy. Quantitative easing (Q.E.) is a monetary policy tool that central banks use to increase the money supply and encourage economic activity. The process involves central banks buying large quantities of long-term government bonds and other securities. Proponents of the strategy argue that it provides necessary economic stimulus beyond the scope of traditional monetary policy. Opponents claim that it increases the risk of runaway inflation without actually bolstering growth.

A working paper, released by the National Bureau of Economic Research and entitled “Fifty Shades of Q.E.: Conflicts of Interest in Economic Research,” compared the findings of research on Q.E. published by central banks with that published by academics.

Dr. Elisabeth Kempf, a professor at the University of Chicago Booth School of Business and co-author of the report, pointed out that academic research has been done on the impact of corporate funding on medical research but that analogous studies for economic research were scarce. “We thought it was surprising that this particular conflict of interest here—central banks evaluating their own policies—hadn't really received much attention so far. There was a gap in the literature that we were trying to fill,” Kempf said.

The professors’ analysis of 54 research papers found that studies done by central banks are more likely to tout the effectiveness of quantitative easing than studies performed by independent academics. In addition, research papers published by central banks, on average, describe Q.E. with more positive language. “The magnitude of the differences between central bank economists and academic economists were quite large, even larger than I would've expected going into this project,” Kempf said.

The report offers several explanations for these disparities. For instance, central bankers may realize that the success of their policies are partially contingent on public perception of the policy, and that their research can shape public opinion. As a result, central banks’ research papers may be a crucial part of their monetary policy.

Dr. Ľuboš Pástor, a professor of finance at the Booth School of Business and co-author of the report, emphasized that central bank research should be viewed within the context of their overall mission. “The mission of a central bank is quite broad. It includes things like price stability, financial stability. Their mission is not necessarily to provide objective research,” Pástor said.

The study also notes that individual economists employed by central banks may worry that writing negatively about their bank’s approach towards Q.E. might endanger their employment or promotion prospects. Indeed, another finding of the working paper is that “central bankers whose papers report larger effects of Q.E. on output have better career outcomes.”

The authors noted that prominent officials of Germany’s central bank have been much more critical of Q.E. than their peers at other central banks. The working paper found that “studies co-authored by Bundesbank employees find Q.E. to be less effective at raising output compared to academic studies.” They cited this finding as additional evidence for the correlation between central bank involvement and researchers’ support for Q.E., adding that this could point towards the pressure that exists for central bank economists to support their institution's policies.

While the authors of the paper believed that it was important to consider potential conflicts of interest inherent in central banks’ research, they hold that central bankers are often the most qualified to assess their own policies. The report maintains that central bank researchers are among the foremost experts on monetary policy and that the evidence reviewed does not imply that central bank research is biased.

The authors of the report emphasized that their aim was not to make specific policy recommendations to banks, but rather to raise awareness and stimulate discussion within central banks. The response to their report has been largely positive, with some senior officials at central banks even thanking the authors for their work.

“I view our responsibility as researchers as simply to uncover an interesting new fact. I’m sure central bankers will be able to figure out what to do with this information,” Pástor said.