Real meaning of central bank independence – independent from govts but slaves to financial markets

A nice rejoinder by Anantha Nageshwaran on the overhyped idea of central bank independence.  – http://tgs.nationalinterest.in/2015/05/05/central-bank-independence/

He says CBI means independent from govt but complete slaves to financial markets:

Wall Street Journal Real Time Economics Blog has a post on the independence of the Reserve Bank of India or, more precisely, the lack thereof, in their eyes. The post falls back on a study of independence of central banks globally, published as a working paper by the Bank of Korea (BoK) in September 2013. Here is the Wall Street Journal picking a brave and correct fight with Ben Bernanke, the former Chairman of the Federal Reserve Board and here is another journalist or department of the newspaper falling back on conventional and outmoded notions of central bank independence. It is time we see through them.

Central Bank Independence might have originated for good reasons when political parties in office wanted to prime the economy ahead of elections, riding the short-term Philips Curve. Central Banks had to be insulated from such pressures and keep focus on maintaining medium to long-term economic stability (note that I am pointedly not using the phrase, ‘price stability’). As with all good things, over time, they deteriorate and become toxic.

Now, Central Bank independence means total slavery to the interests of the financial sector and financial markets. In a very insightful speech, Hervé Hannoun, a deputy General Manager at the Bank for International Settlements, warned that monetary policy is subject to three forms of dominance – fiscal, financial and exchange rate. As I write this, western central banks are subject to all the three dominances. It is hard to pick the most egregious of the three, weighing on central banks in North America, Europe, Japan and possibly China.

Hence, going forward, academics like Barry Eichengreen (he is one of the authors of the BoK working paper referred to above) will be making a honest and useful contribution to the subject of central bank independence if they assess independence of central banks’ policies and regulatory actions from all the three forms of dominance. Second, they should take a fresh look at meaningless buzzwords like ‘transparency’ and ‘innovation’ that barely disguise an agenda loaded in favour of financial sector interests and in favour of boosting asset prices in financial markets. Central banks’ actions supposedly in the furtherance of the values of ‘transparency’ and ‘innovation’ eliminate two-way price risk in financial markets and abet financial sector participants’ short-term profits and their bonuses.

It is nice to see some people atleast realise the folly of all these overblown ideas which have suited certain audience. All these ideas ignore the basic history of CBI and their origins.  Unfortunately, we in India do not realise all this and continue to benchmark our institutions with likes of those in west despite latter’s abysmal failure…

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One Response to “Real meaning of central bank independence – independent from govts but slaves to financial markets”

  1. Wilson Says:

    Very candid reamrks

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