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Reflections on the Current Fashion For Central Bank Independence

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  • Jörg Bibow

    (Univ of Hamburg & Levy Econ Inst)

Abstract

This paper challenges the time-inconsistency case for central bank independence. It argues that the time-inconsistency literature not only seriously confuses the substance of the rules versus discretion debate, but also posits an implausible view of monetary policy. Most worrisome, the inflationary bias featured prominently in the time-inconsistency literature has encouraged the development of a dangerously one-sided approach to central bank independence that entirely ignores the potential risks involved in maximizing central bankers' latitude for discretion. The analysis shows that a more balanced and symmetric approach to central bank independence is urgently warranted. The views of Maynard Keynes and Milton Friedman are shown to shed some illuminating and disconcerting light on a fashionable free-lunch promise that is based on rather shallow theoretical foundations.

Suggested Citation

  • Jörg Bibow, 2001. "Reflections on the Current Fashion For Central Bank Independence," Macroeconomics 0108004, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0108004
    Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 38; figures: included
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    References listed on IDEAS

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    2. Jorg Bibow, "undated". "Easy Money Through The Back Door: The Markets Vs. The ECB," Economics Public Policy Brief Archive ppb_65, Levy Economics Institute.
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    8. Eijffinger, Sylvester C W & Hoeberichts, Marco, 1998. "The Trade off between Central Bank Independence and Conservativeness," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 397-411, July.
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    19. Chant, John F & Acheson, Keith, 1973. "Mythology and Central Banking," Kyklos, Wiley Blackwell, vol. 26(2), pages 362-379.
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    22. Jörg Bibow, 2002. "Keynes on Central Banking and the Structure of Monetary Policy," History of Political Economy, Duke University Press, vol. 34(4), pages 749-787, Winter.
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    Citations

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    Cited by:

    1. Jorg Bibow, 2004. "Fiscal Consolidation: Contrasting Strategies & Lessons From International Experiences," Economics Working Paper Archive wp_400, Levy Economics Institute.
    2. Jorg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute.
    3. Hein, Eckhard, 2001. "Institutions and macroeconomic performance: Central bank independence, labour market institutions and the perspectives for inflation and employment in the European Monetary Union," WSI Working Papers 95, The Institute of Economic and Social Research (WSI), Hans-Böckler-Foundation.
    4. J.W. Mason & Arjun Jayadev, 2015. "Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner," Working Papers 2015_05, University of Massachusetts Boston, Economics Department.
    5. James Forder, 2001. "The Theory of Credibility and the Reputation-bias of Policy," Review of Political Economy, Taylor & Francis Journals, vol. 13(1), pages 5-25.
    6. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, University Library of Munich, Germany.
    7. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown: A Structural Policy Bias Coming Home to Roost?," Economics Working Paper Archive wp_409, Levy Economics Institute.
    8. Ana Esther Castro & José Francisco Teixeira, 2014. "The Formation of New Monetary Policies: Decisions of Central Banks on the Great Recession," Economies, MDPI, Open Access Journal, vol. 2(2), pages 1-15, May.
    9. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Marc Quintyn, 2009. "Independent agencies: more than a cheap copy of independent central banks?," Constitutional Political Economy, Springer, vol. 20(3), pages 267-295, September.
    11. Athina Zervoyianni & Athanasios Anastasiou & Andreas Anastasiou, 2014. "Does central bank independence really matter? Re-assessing the role of the independence of monetary policy-makers in macroeconomic outcomes," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 8(4), pages 427-473.
    12. Jörg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," IMK Studies 35-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    13. Jorg Bibow, 2002. "The Monetary Policies of the European Central Bank and the Euro's (Mal-)Performance: A stability-oriented assessment," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 31-50.
    14. Jorg Bibow, 2001. "Making EMU Work: Some lessons from the 1990s," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 233-259.
    15. C. Sardoni & L. Randall Wray, 2007. "Fixed and Flexible Exchange Rates and Currency Sovereignty," Economics Working Paper Archive wp_489, Levy Economics Institute.
    16. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, University Library of Munich, Germany.
    17. Jörg Bibow, 2006. "Europe's Quest for Monetary Stability. Central Banking Gone Astray," International Journal of Political Economy, Taylor & Francis Journals, vol. 35(1), pages 24-43.
    18. Jorg Bibow, 2015. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution," Economics Working Paper Archive wp_845, Levy Economics Institute.
    19. Brian Snowdon, 2007. "The New Classical Counter-Revolution: False Path or Illuminating Complement?," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 541-562, Fall.
    20. Joerg Bibow, 2006. "Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement?," IMK Studies 01-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    21. Rosaria Rita Canale, 2010. "Central Bank Reaction To Public Deficit And Sound Public Finance The Case Of The European Monetary Union," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 1(1), pages 4-17.

    More about this item

    Keywords

    time inconsistency; central bank independence; monetary policy; rules versus discretion; credibility;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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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