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Reflections on the current fashion for central bank independence

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Author Info
Jörg Bibow
Abstract

This paper challenges the time-inconsistency case for central bank independence. It argues that the time-inconsistency literature not only seriously confuses the substance of the rules vs discretion debate, but also posits an implausible view of monetary policy. Most worryingly, the inflationary bias featured prominently in the time-inconsistency literature has encouraged the development of a dangerously one-sided approach to central bank independence which entirely ignores the potential risks involved in maximising central bankers' latitude for discretion. The analysis shows that a more balanced and symmetric approach to central bank independence is urgently needed. The views of Maynard Keynes and Milton Friedman are shown to shed some illuminating and disconcerting light on a fashionable free-lunch promise that is based on rather shallow theoretical foundations and empirical evidence. Copyright 2004, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/cje/beh013
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Publisher Info
Article provided by Oxford University Press in its journal Cambridge Journal of Economics.

Volume (Year): 28 (2004)
Issue (Month): 4 (July)
Pages: 549-576
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Handle: RePEc:oup:cambje:v:28:y:2004:i:4:p:549-576

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  1. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, EconWPA. [Downloadable!]
  2. Jorg Bibow, 2005. "Europe’s Quest for Monetary Stability: Central Banking Gone Astray," Macroeconomics 0508029, EconWPA. [Downloadable!]
  3. Marc Quintyn, 2009. "Independent agencies: more than a cheap copy of independent central banks?," Constitutional Political Economy, Springer, vol. 20(3), pages 267-295, September. [Downloadable!] (restricted)
  4. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited: To Ditch or to Build on It?," Economics Working Paper Archive wp_427, Levy Economics Institute, The. [Downloadable!]
  5. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA. [Downloadable!]
  6. Brian Snowdon, 2007. "The New Classical Counter-Revolution: False Path or Illuminating Complement?," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 541-562, Fall. [Downloadable!]
  7. Joerg Bibow, 2005. "Europe's Quest for Monetary Stability: Central Banking Gone Astray," Economics Working Paper Archive wp_428, Levy Economics Institute, The. [Downloadable!]
  8. Joerg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute, The. [Downloadable!]
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