The future of central bank independence…

A day of reporting surveys.

In another survey on central bank independence team of economists report the findings:

 Earlier independence was seen as crucial for lower inflation. But due to several economic factors high inflation is not seen as a problem today in developed economies. So, the linkages between independence and inflation have weakened.

The discussion above makes clear that our experts think that there are serious challenges to central bank independence and that the current economic environment is quite different to the one that led to central bank independence.

Some repeat their desire for an improvement in current arrangements. Jordi Gali comments, “Appointments of governors/presidents are still too partisan in many countries. Parliamentary hearings, possibly with the participation of external experts, and a significant multi-partisan support for a candidate, would be highly welcome.” John Hassler (Stockholm University) writes that “[i]t needs to be clarified that the broad measures with substantial fiscal components used during the Great Recession cannot permanently be in the hands of an independent central bank.’

Nevertheless, an overwhelming majority still favours central bank independence. Gali unequivocally states that “[c]entral bank independence, combined with a high level of transparency and accountability, is in my view the best arrangement for advanced economies”.

Others argue that central bank independence has a proven track record. For example, Ricardo Reis says that “among all economic policymaking institutions in most advanced countries today, central banks tend to be the better prepared, the better informed, and make the more sensible decisions. Their success at keeping inflation close to targets in the past 15 years has been extraordinary. Their responses to the financial and debt crisis were, with all their flaws and shortcomings, still much better than that of almost all other policy institutions. I am worried that there has been too much discretionary policymaking, and too quick an embrace of financial stability as a goal that can be achieved by the central bank alone. But for now, the track record of independent central banks is very good.”

In contrast, the very few who disagree reject the validity of independent institutions making choices with political consequences. Andrew Mountford argues that “the control of the amount of credit in the economy and the control of the banking sector more generally is intrinsically political. … The idea that control of this sector should be removed from government and thus ultimately from accountability to those that the system is supposed to work for (the general public) is economically ludicrous … and politically terrifying.”


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