I had pointed out to the interesting case study of Argentina’s central bank. The post shows how Argentina’s central bank has lost its credibility and received a shock on its independence. The Central bank governor was fired for not agreeing to Argentine President on an economic issue.
This crisis has led to a severe strain on the idea of central bank independence. Most central banks have ended up intervening in financial markets saving financial firms. They have done work which belongs to finance ministry etc. And now this political pressure.
Charles Plosser, Philadelphia Fed President points Central Bank of Argentina is not alone here:
Another way independence is currently threatened arises from efforts to make political appointees out of the Reserve Bank presidents or members of their boards of directors. Both the threat of “policy audits” and the political appointment of presidents or directors are not-so subtle efforts to politicize the Federal Reserve.
These changes run counter to history and the principles of sound and responsible central banking. Over the past 30 years, many countries have acted to increase the degree of independence of monetary policymaking from short-term political influences. These moves reflect empirical research that generally shows that developed countries whose central banks have greater independence tend to have lower and more stable inflation without sacrificing employment or output, thus benefiting from more stable economies and better economic performance.
The assault on central banks is not confined to the U.S. It is showing up in a number of countries and in different ways. Just since January 1, 2010, here is a sampling from recent news reports of what central bankers have faced in other countries:1
Argentina’s president fired the governor of the central bank when he refused to transfer $6.6 billion in foreign-exchange reserves to the government’s coffers to meet fiscal expenses ahead of next year’s election.
South Korea’s president, not surprisingly, has urged the Bank of Korea to go slow on its exit strategy from accommodative monetary policy. However, to underscore the point, he sent a vice minister to attend a Monetary Policy Committee meeting for the first time in a decade.
Japan’s new administration has put increasing pressure on the Bank of Japan to increase lending. This month, the new finance minister said he was looking for even more cooperation from Japan’s central bank.
Mexico’s president has appointed a new governor for the Bank of Mexico, after clashing with its former governor over the central bank’s reluctance to cut interest rates.
This is worrisome. Two of these – Mexico and South Korea are inflation targeting central banks which are deemed as more independent than other central banks.
Plosser reviews importance of central bank independence. He criticises politicians move to audit Fed’s monetary policy as it would compromise central bank independence.