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Do We Really Need Central Bank Independence? A Critical Re- examination

  • Bernd Hayo

    (Georgetown University & University of Bonn)

  • Carsten Hefeker

    (University of Basel)

In this survey, we critically review the argument for central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, CBI should not be treated as an exogenous variable, but instead attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems. Third, in a number of empirical studies, researchers found CBI is correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there is no reason to believe the correlation between CBI and low inflation tells us anything about causality.

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Paper provided by EconWPA in its series Macroeconomics with number 0103006.

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Length: 31 pages
Date of creation: 21 Mar 2001
Date of revision:
Handle: RePEc:wpa:wuwpma:0103006
Note: Type of Document - PDF; prepared on IBM PC; pages: 31
Contact details of provider: Web page: http://128.118.178.162

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