The Bank of Japan and the Federal Reserve: Financial Liberalization, Independence, and Regulatory Responsibility

Few disagree government has the responsibility to provide a stable financial and monetary environment, though considerable debate exists over how this responsibility should be carried out and what type of institutions should be assigned the responsibility. Prior to the advent of Keynesian demand management after the Second World War, central banks carried out this objective in three ways: (i) by providing monetary growth to match the needs of trade so as to stabilize the price level; (ii) by providing lender-of-last-resort services to limit contagion and runs on depository institutions; and (iii) by providing financial regulation and supervision to limit risk-taking by depository institutions.1