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Reflections on the current fashion for central bank independence

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  • 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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  • Jörg Bibow, 2004. "Reflections on the current fashion for central bank independence," Cambridge Journal of Economics, Oxford University Press, vol. 28(4), pages 549-576, July.
  • Handle: RePEc:oup:cambje:v:28:y:2004:i:4:p:549-576
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    File URL: http://hdl.handle.net/10.1093/cje/beh013
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    Cited by:

    1. Jorg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute.
    2. J.W. Mason & Arjun Jayadev, 2015. "Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner," Working Papers 2015_05, University of Massachusetts Boston, Economics Department.
    3. Jorg Bibow, 2005. "Liquidity Preference Theory Revisited: To Ditch or to Build on It?," Economics Working Paper Archive wp_427, Levy Economics Institute.
    4. Ana Esther Castro & José Francisco Teixeira, 2014. "The Formation of New Monetary Policies: Decisions of Central Banks on the Great Recession," Economies, MDPI, Open Access Journal, vol. 2(2), pages 1-15, May.
    5. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, EconWPA.
    6. 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.
    7. Athina Zervoyianni & Athanasios Anastasiou & Andreas Anastasiou, 2014. "Does central bank independence really matter? Re-assessing the role of the independence of monetary policy-makers in macroeconomic outcomes," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 8(4), pages 427-473.
    8. Jorg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," Economics Working Paper Archive wp_780, Levy Economics Institute.
    9. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA.
    10. Jorg Bibow, 2005. "Europe’s Quest for Monetary Stability: Central Banking Gone Astray," Macroeconomics 0508029, EconWPA.
    11. Jörg Bibow, 2015. "The euro's savior? Assessing the ECB's crisis management performance and potential for crisis resolution," IMK Studies 42-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    12. Jörg Bibow, 2013. "Lost at Sea:The Euro Needs a Euro Treasury," FMG Special Papers sp227, Financial Markets Group.
    13. 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.
    14. Jörg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," IMK Studies 35-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. Jorg Bibow, 2005. "Europe's Quest for Monetary Stability: Central Banking Gone Astray," Economics Working Paper Archive wp_428, Levy Economics Institute.

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