Central Bank Independence: Can it Survive a Crisis?

Central bank independence has for many years appeared to be a successfulway of ensuring low inflation. But that independence has beenmodified, compromised, or even ended in the wake of the recent financialcrisis. This paper explains why such shocks are likely to affect independenceas a consequence of the inevitable incompleteness of the contractwhich codifies the relationship between central banks and governments.This explanation is supported by examination of some historical episodes,primarily from the UK as that has one of the world's oldest central banksand thus a very long run of data, but also from other countries.Having shown the inevitably fragile nature of central bank independencein a world where shocks are inevitable, the paper then concludeswith a few remarks about the implications for price stability over thelonger term.