A sceptical view on Central Bank Independence

I came across this wow paper on central bank Independence by Carsten Hefeker and Bernd Hayo.  The paper basically argues via numerous arguments that giving central bank independence alone does not lead to price stability. Infact it is neither necessary nor a sufficient condition.

In this survey, we present a number of arguments that question some aspects of the conventional view of central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability.

First, CBI is just one potentially useful monetary policy design instrument among several.

Second, while the relevant economic theories focus on the aspect of goal independence, in practice most central banks tend to be only instrument independent.

Third, CBI should not be treated as an exogenous variable, but attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems.

Fourth, in a number of empirical studies, researchers found CBI to be correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there remains little reason to believe the correlation between CBI and low inflation tells us anything about causality. 

The paper is excellent. Apart from presenting a sceptical view on central bank independence, it has excellent review of history of monetary economics and very rich literature survey. It also gives you a very different perspective on central bank independence (the reading list keeps rising exponentially but the pace of reading is not even linear!!!).  

The main lesson again is not that CPI is bad but by simply granting CBI you cannot achieve anything. Much more is needed.


5 Responses to “A sceptical view on Central Bank Independence”

  1. Literature Survey on Communication and Monetary Policy « Mostly Economics Says:

    […] Mostly Economics Mostly on research work in Economics and Financial System with focus on India « A sceptical view on Central Bank Independence […]

  2. A sceptical view on Central Bank Independence « acc3ss.info Says:

    […] Original post: A sceptical view on Central Bank Independence […]

  3. A sceptical view on Central Bank Independence « Mostly Economics | Filing bank ruptcy online Says:

    […] slope independence lonely does not advance to toll stability. … Here is the original:  A sceptical analyse on Central Bank metropolis « Mostly Economics Posted in Uncategorized | Tags: a-numerous-arguments, alone-does, argues-via, bernd, […]

  4. Best Business VOIP System Solutions | Intro to SIP Systems Says:

    […] A sceptical view on Central Bank Independence « Mostly Economics […]

  5. Does who chairs the Central Bank matter? « Mostly Economics Says:

    […] Ken Kuttner). There are many interesting facets of central banking – which anchor to choose, politics, independence, communications , legal aspects , monetary policy committees […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: