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Reflections on the Current Fashion For Central Bank Independence

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  • Jörg Bibow

    (Univ of Hamburg & Levy Econ Inst)

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    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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    File URL: http://128.118.178.162/eps/mac/papers/0108/0108004.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0108004.

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    Length: 38 pages
    Date of creation: 09 Aug 2001
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0108004

    Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 38; figures: included
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    Web page: http://128.118.178.162

    Related research

    Keywords: time inconsistency; central bank independence; monetary policy; rules versus discretion; credibility;

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    References

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    1. 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.
    2. 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.
    3. 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.
    4. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    5. 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.
    6. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
    7. 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.
    8. 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.
    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.
    10. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    11. Eijffinger, S.C.W. & Hoeberichts, M.M., 1996. "The Trade Off Between Central Bank Independence and Conservativeness," Discussion Paper 1996-44, Tilburg University, Center for Economic Research.
    12. Alesina, Alberto & Roubini, Nouriel, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 663-88, October.
    13. 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,.
    14. Jorg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Economics Working Paper Archive wp_323, Levy Economics Institute.
    15. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
    16. Jörg Bibow, 2001. "Easy Money through the Back Door: The Markets vs. the ECB," Macroeconomics 0103004, EconWPA.
    17. 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.
    18. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
    19. 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.
    20. Chant, John F & Acheson, Keith, 1973. "Mythology and Central Banking," Kyklos, Wiley Blackwell, vol. 26(2), pages 362-79.
    21. Forder, James, 1996. "On the Assessment and Implementation of 'Institutional' Remedies," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 39-51, January.
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    Citations

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    Cited by:
    1. Jörg Bibow, 2001. "The Monetary Policies of the European Central Bank and the Euro's (Mal)Performance: A Stability-Oriented Assessment," Macroeconomics 0109004, EconWPA.
    2. Joerg Bibow, 2004. "Fiscal Consolidation Contrasting Strategies & Lessons from International Experience," Macroeconomics 0402014, EconWPA.
    3. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown A Structural Policy Bias Coming Home to Roost?," Macroeconomics 0407026, EconWPA.
    4. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown: A Structural Policy Bias Coming Home to Roost?," Economics Working Paper Archive wp_409, Levy Economics Institute.

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