Central bank independence : a critical view
While expansive literature on central bank independence contains some criticisms to the independent central bank quasi-paradigm, few critical analyses have been undertaken in the years between Friedman (1962) and Posen (1994). The author extends Posen's analysis to developing countries, discussing more broadly and systematically the reasons why merely instituting an independent central bank may not bring about its professed benefits, especially in developing countries. The author argues that widely reported empirical tests that are purported to support the central bank independence proposition are plagued by potential problems of simultaneity, reverse causality, missing variables, and measurement errors. Yet one can not make positive recommendations about institutional arrangements for central banks if causality relations are not well established. Institutions are shaped by a country's record of and preferences for inflation and may have little influence on them. The author also argues that the purported benefits of an independent central bank may be eroded by conflicts between fiscal and monetary policy and by inherent problems of central bank institutional design (especially mechanisms for board appointments, public accountability, and budgetary control). If these institutional problems are not solved, problems of dynamic inconsistency traditionally associated with monetary policy are not eliminated,but merely transformed. The author suggests that the benefits of central bank independence are less likely obtained in less developed countries with shallow financial markets. Accordingly, central bank independence should be granted at a later stage in a country's financial sector development. If a less developed country seeks to establish a low-inflation path, it should concentrate on instituting financial policy reforms (such as liberalization and privatization) that bolster opposition to inflation rather than easily reversible and practically meaningless changes in legal and institutional structures. This will better ensure the sustainability -- and hence the credibility -- of the government's anti-inflation stance. Fiscal policy is often at the root of macroeconomic disturbances in developing countries. Fiscal policy is more deserving of special protection from politics because of fiscal dominance over monetary policy and its greater vulnerability to private interests. The author suggests that the solution might be to make fiscal policy less susceptible to political pressures by creating an independent fiscal board. Tying the fiscal hands of government may seem a far-fetched idea. But would it not make more sense to force discipline on fiscal policy directly rather than indirectly through monetary policy?
|Date of creation:||30 Sep 1994|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Walsh, Carl E., 1993. "Central bank strategies, credibility, and independence : A review essay," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 287-302, November.
- Cukierman, A. & Webb, S., 1994. "Political Influence on the Central Bank : International Evidence," Discussion Paper 1994-100, Tilburg University, Center for Economic Research.
- 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.
- Cukierman, Alex & Webb, Steven B, 1995.
"Political Influence on the Central Bank: International Evidence,"
World Bank Economic Review,
World Bank Group, vol. 9(3), pages 397-423, September.
- Alex Cukierman & Steven Webb, 1995. "Political Influence on the Central Bank- International Evidence," University of Chicago - George G. Stigler Center for Study of Economy and State 114, Chicago - Center for Study of Economy and State.
- Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
- repec:dgr:kubcen:1994100 is not listed on IDEAS
- Ben Bernanke & Frederic Mishkin, 1992.
"Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries,"
in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238
National Bureau of Economic Research, Inc.
- Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations From Six Industrialized Countries," NBER Working Papers 4082, National Bureau of Economic Research, Inc.
- Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Burdekin, Richard C K & Laney, Leroy O, 1988.
"Fiscal Policymaking and the Central Bank Institutional Constraint,"
Wiley Blackwell, vol. 41(4), pages 647-62.
- Richard C.K. Burdekin & Leroy O. Laney, 1986. "Fiscal policymaking and the central bank institutional constraint," Research Paper 8606, Federal Reserve Bank of Dallas.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
- Goodhart, Charles A E, 1994. "Game Theory for Central Bankers: A Report to the Governor of the Bank of England," Journal of Economic Literature, American Economic Association, vol. 32(1), pages 101-14, March.
- Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 95-140, December.
- Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
- Persson, Torsten, 1988. "An introduction and a broad survey," European Economic Review, Elsevier, vol. 32(2-3), pages 519-532, March.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1356. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.