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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.

Suggested Citation

  • Jörg Bibow, 2004. "Reflections on the current fashion for central bank independence," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 28(4), pages 549-576, July.
    • Handle: RePEc:oup:cambje:v:28:y:2004:i:4:p:549-576
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    More about this item

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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