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Independent Central Banks: Some theoretical and empirical problems?

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  • Peter Howells

    () (UWE, Bristol)

Abstract

In little more than twenty years, it has become widely accepted that the optimal design of monetary policy should include provision for a central bank that is independent of government influence. This is a remarkably short period of time for any idea in economics to become so widely-accepted. But there are problems. In this paper we show that there are many confusions and even some contradictions associated with central bank independence. To begin with, it is not entirely clear what it is exactly that central banks need to be independent of. Furthermore, there is confusion over the mechanisms whereby independence is supposed to deliver its benefits. The literature which is commonly said to provide the rationale for independence is often misunderstood and the evidence that independence does in fact enhance policy outcomes is extremely weak.

Suggested Citation

  • Peter Howells, 2009. "Independent Central Banks: Some theoretical and empirical problems?," Working Papers 0908, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  • Handle: RePEc:uwe:wpaper:0908
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    File URL: http://carecon.org.uk/DPs/0908.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
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    3. Dai, Meixing & Sidiropoulos, Moïse, 2008. "Central bank's conservativeness and transparency," Research in Economics, Elsevier, vol. 62(4), pages 179-187, December.
    4. Charles Freedman, 1996. "What operating procedures should be adopted to maintain price stability? practical issues," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 241-285.
    5. Posen, Adam, 1998. "Central Bank Independence and Disinflationary Credibility: A Missing Link?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 335-359, July.
    6. Goodhart, Charles A E & Huang, Haizhou, 1998. "Time Inconsistency in a Model with Lags, Persistence, and Overlapping Wage Contracts," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 378-396, July.
    7. repec:kap:iaecre:v:12:y:2006:i:3:p:287-297 is not listed on IDEAS
    8. James Forder, 2003. "'Independence' and the founding of the Federal Reserve," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(3), pages 297-310, August.
    9. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
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    11. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-538, June.
    12. Ottmar Issing, 2006. "Central Bank Independence - Economic and Political Dimensions," National Institute Economic Review, National Institute of Economic and Social Research, vol. 196(1), pages 66-76, April.
    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 353-398, September.
    14. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
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    Cited by:

    1. Geeta Garg, 2015. "Impact of trilemma indicators on macroeconomic policy: Does central bank independence matter?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-019, Indira Gandhi Institute of Development Research, Mumbai, India.

    More about this item

    Keywords

    independent central banks;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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