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

Author

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  • Bernd Hayo

    (Georgetown University & University of Bonn)

  • Carsten Hefeker

    (University of Basel)

Abstract

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.

Suggested Citation

  • Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0103006
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    Cited by:

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    2. Geeta Garg, 2015. "Impact of trilemma indicators on macroeconomic policy: Does central bank independence matter?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-019, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Stefan Voigt, 2011. "Positive constitutional economics II—a survey of recent developments," Public Choice, Springer, vol. 146(1), pages 205-256, January.
    4. Masciandaro, Donato & Quintyn, Marc & Taylor, Michael W., 2008. "Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants," European Journal of Political Economy, Elsevier, vol. 24(4), pages 833-848, December.
    5. Donato Masciandaro & Mr. Marc G Quintyn & Mr. Michael W Taylor, 2008. "Financial Supervisory Independence and Accountability–Exploring the Determinants," IMF Working Papers 2008/147, International Monetary Fund.
    6. Ahmet Emrah Tayyar, 2017. "Political Monetary Cycles In Coalition And Single Party Government Periods: A Case Study On Turkey," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 89-111, December.
    7. Theodore Panagiotidis & Afroditi Triampella, 2006. "Central Bank Independence and inflation: the case of Greece," Revista de Economía del Rosario, Universidad del Rosario, June.
    8. 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.
    9. Bernd Hayo & Stefan Voigt, 2008. "Inflation, Central Bank Independence, and the Legal System," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 751-777, December.
    10. Bihari, Péter, 2017. "A jegybanki függetlenség és elszámoltathatóság a válság előtt és után [Independence and accountability of central banks before and after the global financial crisis]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 573-593.
    11. Erixon, Lennart, 2011. "Under the influence of traumatic events, new ideas, economic experts and the ICT revolution - the economic policy and macroeconomic performance of Sweden in the 1990s and 2000s," Research Papers in Economics 2011:25, Stockholm University, Department of Economics.

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    Keywords

    Central bank independence; monetary policy;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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