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The Elusive Promise of Independent Central Banking

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  • Marvin Goodfriend

    (Professor of Economics, Tepper School of Business, Carnegie Mellon University (E-mail: marvingd@andrew.cmu.edu))

Abstract

Independent central banking is reviewed as it emerged first under the gold standard and later with an inconvertible paper money. Monetary and credit policy are compared and contrasted as practiced by the 19th century Bank of England and the Federal Reserve. The lesson is that wide operational and financial independence given to monetary and credit policy in the public interest subjects the central bank to incentives detrimental for macroeconomic and financial stability. An independent central bank needs the double discipline of a priority for price stability and bounds on expansive credit initiatives to secure its promise for stabilization policy.

Suggested Citation

  • Marvin Goodfriend, 2012. "The Elusive Promise of Independent Central Banking," IMES Discussion Paper Series 12-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:12-e-09
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    File URL: https://www.imes.boj.or.jp/research/papers/english/12-E-09.pdf
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    References listed on IDEAS

    as
    1. Edward C. Prescott, 2006. "The Transformation of Macroeconomic Policy and Research," The American Economist, Sage Publications, vol. 50(1), pages 3-20, March.
    2. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981.
    3. Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Economic Review, Federal Reserve Bank of Richmond, vol. 74(May), pages 3-22.
    4. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 203-235, April.
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    6. Marvin Goodfriend & Jeffrey M. Lacker, 1999. "Limited commitment and central bank lending," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-27.
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    8. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-374, June.
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    More about this item

    Keywords

    Bank of England; central bank independence; credit turmoil of 2007-8; Federal Reserve; Great Inflation; lender of last resort; monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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