Central Bank Independence

I just came across this brief interview of Jean-Claude Trichet, President of European Central Bank where he stresses the importance of independence of ECB to deliver its objective of price stability.

DIE ZEIT: You mentioned independence as the legacy of the Bundesbank. Do you have an absolute independence in mind? An independence that forbids even critique from the political side?

Trichet: It is simpler than that: I refer to Article 108 of the Maastricht Treaty. It says the executive branches in particular should not try to influence our decisions. It is a very clear wording. So it’s not the ECB who defines its independence, it is the Treaty, which was approved by the people of the member states, by the people of all our democracies. Everybody is welcome to criticise our policy – the media, the analysts, the academics. And we are, as an independent institution, as a last resort, accountable to the people of Europe. By the way it is not known that I go more often to the European Parliament than our friends from the American Federal Reserve go to the US Congress.

For the uninitiated, Bundesbank (The German Central Bank) was hugely successful in fighting inflation and most Central Banks try and follow the path adopted by the former.

The interview tells of the instances when both, Bundesbank and ECB clashed with the polity over interest rates. It is pretty interesting. I loved this quote:

DIE ZEIT: Wim Duisenberg once said, the Bundesbank is like Cream – the more you whip it the harder it gets. The same is true for the ECB…..

His mantra for growth:

Monetary stability. Independence. Credibility. These principles are very favourable for sustained growth and job creation. Today it’s globally recognized that this is the right way for monetary policy to deliver price stability and, by way of consequence, sustainable growth.

He also stresses the importance of communicating to the public. Worth a read.

Assorted Links

1. Greg Mankiw on Sociology of Economics. Also read Mankiw’s posting Adios to Washington Consensus.

2. Why do economists disagree? Dani Rodrik explains.

3. Financial Professor pointsout Warren Buffet recommends index funds.

4. In ET, Jaideep Mishra says Indian finance professors need to publish their papers in top 3 finance journals. I would say leave the finance journals, publish something atleast. The web is a more useful way to publish than journals as this recent paper has shown.  

He also reviews the recent hedge fund paper I reviewd here.

5. Rajeev Malik on post monetary policy. Very insightful.

6. Everybody is talking of rupee appreciation. In BS, Kalpana Kochhar (IMF’s India chief) and Andrea Richter Hume (Sr. economist, Fund’s India team) have their own thought. They say it is possible to grow despite rupee appreciation and the fact that rupee appreciation would hurt growth, is overstated. They point out to evidences how various countries have managed to do so. So, the best way is to improve competitiveness and not bother much about rupee.

I don’t really think that is the right solution. Improving competitveness etc is something whuich takes time and I beleive it is already underway. The problem is not with rupee appreciation per se but the way it has been allowed to  appreciate. All of a sudden RBI let off the rupee and this has cost SME exporters dear. The authors assume rupee would continue to appreciate but with RBI intervening every now and then, nothing is clear on that front.

But what irked me most was this from the article:

In any case, a weaker rupee would provide no guarantee that exports would grow faster. India’s experience during the 1970s and 1980 makes this clear. Even though the rupee lost more than half its value in real terms against the U.S. dollar, exports grew slowly, and India’s share in world trade fell by a third.

1970′s and 1980′s? That time there were too many restrictions and exports were hardly allowed so the question of export growing does not arise at all.