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Reflections on the Current Fashion for Central Bank Independence

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Author Info
Jorg 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 versus discretion debate, but also posits an implausible view of monetary policy. Most worrisome, the inflationary bias featured prominently in the time-inconsistency literature has encouraged the development of a dangerously one-sided approach to central bank independence that entirely ignores the potential risks involved in maximizing central bankers' latitude for discretion. The analysis shows that a more balanced and symmetric approach to central bank independence is urgently warranted. 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.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number 334.

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  1. Willem H. Buiter, 1981. "The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations," NBER Technical Working Papers 0009, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Jeffrey C. Fuhrer, 1997. "Central bank independence and inflation targeting: monetary policy paradigms for the next millenium?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 19-36. [Downloadable!]
  3. Jörg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Macroeconomics 0103004, EconWPA. [Downloadable!]
  4. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May. [Downloadable!] (restricted)
  6. Gartner, Manfred, 1999. "The election cycle in the inflation bias: evidence from the G-7 countries," European Journal of Political Economy, Elsevier, vol. 15(4), pages 705-725, November. [Downloadable!] (restricted)
  7. Alberto Alesina & Nouriel Roubini, 1990. "Political Cycles in OECD Economies," NBER Working Papers 3478, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June. [Downloadable!] (restricted)
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  9. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 497-520, April. [Downloadable!] (restricted)
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  10. Chant, John F & Acheson, Keith, 1973. "Mythology and Central Banking," Kyklos, Blackwell Publishing, vol. 26(2), pages 362-79.
  11. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May. [Downloadable!] (restricted)
  12. Forder, James, 1996. "On the Assessment and Implementation of 'Institutional' Remedies," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 39-51, January. [Downloadable!] (restricted)
  13. Eijffinger, S.C.W. & Hoeberichts, M., 1996. "The trade off between central bank independence and conservativeness," Discussion Paper 44, Tilburg University, Center for Economic Research. [Downloadable!]
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  14. Fry, Maxwell J, 1998. "Assessing Central Bank Independence in Developing Countries: Do Actions Speak Louder Than Words?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 512-29, July.
  15. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier. [Downloadable!] (restricted)
  16. Jorg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Economics Working Paper Archive 323, Levy Economics Institute, The. [Downloadable!]
  17. Bean, Charles, 1998. "The New UK Monetary Arrangements: A View from the Literature," Economic Journal, Royal Economic Society, vol. 108(451), pages 1795-1809, November. [Downloadable!] (restricted)
  18. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February. [Downloadable!] (restricted)
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  19. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 195-225. [Downloadable!]
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  20. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
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