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The Effectiveness of Central Bank Independence Versus Policy Rules

  • John B. Taylor

    ()

    (Stanford University)

This paper assesses the relative effectiveness of central bank independence versus policy rules for the policy instruments in bringing about good economic performance. It examines historical changes in (1) macroeconomic performance, (2) the adherence to rules-based monetary policy, and (3) the degree of central bank independence. Macroeconomic performance is defined in terms of both price stability and output stability. Factors other than monetary policy rules are examined. Both de jure and de facto central bank independence at the Fed are considered. The main finding is that changes in macroeconomic performance during the past half century were closely associated with changes the adherence to rules-based monetary policy and in the degree of de facto monetary independence at the Fed. But changes in economic performance were not associated with changes in de jure central bank independence. Formal central bank independence alone has not generated good monetary policy outcomes. A rules-based framework is essential.

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File URL: http://www-siepr.stanford.edu/repec/sip/12-009.pdf
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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 12-009.

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Date of creation: Jan 2013
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Handle: RePEc:sip:dpaper:12-009
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  1. repec:cto:journl:v:31:y:2011:i:3:p: is not listed on IDEAS
  2. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik Hendrik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," IMFS Working Paper Series 49, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
  3. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 339-366.
  4. 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.
  5. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Working Paper Series 1565, European Central Bank.
  6. George A. Kahn, 2010. "Taylor rule deviations and financial imbalances," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 63-99.
  7. John B. Taylor, 2011. "Legislating a Rule for Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 31(3), pages 407-415, Fall.
  8. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
  9. Michael D. Bordo & John Landon-Lane, 2013. "Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence," NBER Working Papers 19585, National Bureau of Economic Research, Inc.
  10. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
  11. Ahrend, Rudiger, 2008. "Monetary Ease: A Factor behind Financial Crises? Some Evidence from OECD Countries," Economics Discussion Papers 2008-44, Kiel Institute for the World Economy (IfW).
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  14. Pier Francesco Asso & George A. Kahn & Robert Leeson, 2007. "The Taylor rule and the transformation of monetary policy," Research Working Paper RWP 07-11, Federal Reserve Bank of Kansas City.
  15. Christopher Crowe & Ellen E. Meade, 2007. "The Evolution of Central Bank Governance around the World," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 69-90, Fall.
  16. John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn't: A Tale of Two Eras," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1017-1032, 09.
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