IDEAS home Printed from https://ideas.repec.org/p/imk/fmmpap/49-2019.html
   My bibliography  Save this paper

Central Bank Independence

Author

Listed:
  • Thomas I. Palley

Abstract

The case for central bank independence is built on an intellectual two-step. Step one argues there is a problem of inflation prone government. Step two argues independence is the solution to that problem. This paper challenges that case and shows it is based on false politics and economics. The paper argues central bank independence is a product of neoliberal economics and aims to institutionalize neoliberal interests. As regards economics, independence rests on a controversial construction of macroeconomics and also fails according to its own microeconomic logic. That failure applies to both goal independence and operational independence. It is a myth to think a government can set goals for the central bank and then leave it to the bank to impartially and neutrally operationalize those goals. Democratic countries may still decide to implement central bank independence, but that decision is a political one with non-neutral economic and political consequences. It is a grave misrepresentation to claim independence solves a fundamental public interest economic problem, and economists make themselves accomplices by claiming it does.

Suggested Citation

  • Thomas I. Palley, 2019. "Central Bank Independence," FMM Working Paper 49-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:49-2019
    as

    Download full text from publisher

    File URL: http://www.boeckler.de/pdf/p_fmm_imk_wp_49_2019.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Buiter, Willem, 2014. "Central Banks: Powerful, Political and Unaccountable?," CEPR Discussion Papers 10223, C.E.P.R. Discussion Papers.
    2. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274, National Bureau of Economic Research, Inc.
    3. Olivier Blanchard, 2018. "Should We Reject the Natural Rate Hypothesis?," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 97-120, Winter.
    4. William D. Nordhaus, 1975. "The Political Business Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(2), pages 169-190.
    5. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    7. Michalis Nikiforos & Duncan K. Foley, 2012. "Distribution And Capacity Utilization: Conceptual Issues And Empirical Evidence," Metroeconomica, Wiley Blackwell, vol. 63(1), pages 200-229, February.
    8. Gerald Epstein, 1992. "Political Economy and Comparative Central Banking," Review of Radical Political Economics, Union for Radical Political Economics, vol. 24(1), pages 1-30, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Louis-Philippe Rochon & Guillaume Vallet, 2022. "The institutions of the people, by the people and for the people? Addressing central banks' power and social responsibility in a democracy," PSL Quarterly Review, Economia civile, vol. 75(301), pages 83-102.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van Lelyveld, Iman, 1999. "Inflation or unemployment? Who cares?," European Journal of Political Economy, Elsevier, vol. 15(3), pages 463-484, September.
    2. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482, Elsevier.
    3. Tim Vlandas, 2016. "The impact of the elderly on inflation rates in developed countries," LEQS – LSE 'Europe in Question' Discussion Paper Series 107, European Institute, LSE.
    4. Francisco Rosende, 1997. "La Autonomía del Banco Central una Vez Más," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(101), pages 3-26.
    5. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Berlemann, Michael & Hielscher, Kai, 2009. "Measuring Effective Monetary Policy Conservatism," Working Paper 89/2009, Helmut Schmidt University, Hamburg.
    7. Richard Mash, 2000. "The Time Inconsistency of Monetary Policy with Inflation Persistence," Economics Series Working Papers 15, University of Oxford, Department of Economics.
    8. Donato Masciandaro, 1995. "Designing a central bank: Social player, monetary agent, or banking agent?," Open Economies Review, Springer, vol. 6(4), pages 399-410, October.
    9. Philip Keefer & David Stasavage, 1998. "When does delegation improve credibility? Central Bank independence and the separation of powers," CSAE Working Paper Series 1998-18, Centre for the Study of African Economies, University of Oxford.
    10. D'Amato, Marcello & Martina, Riccardo, 2005. "Credibility and commitment of monetary policy in open economies," European Journal of Political Economy, Elsevier, vol. 21(4), pages 872-902, December.
    11. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    12. William Roberts Clark & Vincent Arel-Bundock, 2013. "Independent but Not Indifferent: Partisan Bias in Monetary Policy at the Fed," Economics and Politics, Wiley Blackwell, vol. 25(1), pages 1-26, March.
    13. Mihov, Ilian & Sibert, Anne, 2006. "Credibility and Flexibility with Independent Monetary Policy Committees," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 23-46, February.
    14. Hielscher, Kai & Markwardt, Gunther, 2012. "The role of political institutions for the effectiveness of central bank independence," European Journal of Political Economy, Elsevier, vol. 28(3), pages 286-301.
    15. Franz R. Hahn & Peter Mooslechner, 1999. "Zur Fundierung des Designs des Europäischen Zentralbanksystems," WIFO Monatsberichte (monthly reports), WIFO, vol. 72(1), pages 49-60, January.
    16. Francesco Salsano, 2022. "Monetary policy when the objectives of central bankers are imperfectly observable," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(4), pages 396-415, September.
    17. Ilian Mihov & Anne Sibert, 2002. "Credibility and Flexibility with Monetary Policy Committees," Working Papers 232002, Hong Kong Institute for Monetary Research.
    18. Michael Berlemann & Kai Hielscher, 2016. "Measuring Effective Monetary Policy Conservatism of Central Banks: A Dynamic Approach," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 105-132, May.
    19. Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-399, August.
    20. Esteban Colla De Robertis, 2010. "Monetary Committee Size and Special Interest Influence," Documentos de Investigación - Research Papers 2, CEMLA.

    More about this item

    Keywords

    central bank independence; neoliberalism; class conflict; time consistency; operational independence; democracy;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imk:fmmpap:49-2019. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sabine Nemitz (email available below). General contact details of provider: https://edirc.repec.org/data/fmbocde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.