Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-25T02:48:48.942Z Has data issue: false hasContentIssue false
  • English
  • Français

Central Bank Independence - Economic and Political Dimensions

Published online by Cambridge University Press:  26 March 2020

Ottmar Issing
Ottmar Issing*
Affiliation:
European Central Bank
*
e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This article reviews the empirical evidence and theoretical arguments for central bank independence, including political economy considerations. It concludes that the optimal institutional framework to keep inflation lastingly under control is based on granting independence to central banks and establishing price stability as the overriding objective of monetary policy. This framework — combined with appropriate appointment procedures, a sound governance structure and a well-defined monetary policy strategy of the central bank — would ensure price stability. Finally, public support for central bank independence also matters. In this respect, the central bank has a special role in nurturing a stability-oriented culture in society.

Keywords

Central bank independencecredibilitymonetary policystability cultureE42E50E58
Type
Articles
Information
National Institute Economic Review , Volume 196 , 01 April 2006 , pp. 66 - 76
Copyright
Copyright © 2006 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I would like to thank Wolfgang Modery and Roberto Motto for their valuable contributions.

References

Albanesi, S., Chari, V.V. and Christiano, L.J. (2001), ‘How severe is the time inconsistency problem in monetary policy?’, NBER Working Paper No 8139.CrossRefGoogle Scholar
Alesina, A. (1987), ‘Macroeconomic policy in a two-country system as a repeated game’, Quarterly Journal of Economics, pp. 651–78.CrossRefGoogle Scholar
Alesina, A., Blanchard, O., Gali, J., Giavazzi, F. and Uhlig, H. (2001), ‘Defining a macroeconomic framework for the euro area’, Monitoring the European Central Bank, 3, London, CEPR.Google Scholar
Alesina, A. and Gatti, R. (1995), ‘Independent central banks: low inflation at no costs?’, American Economic Review, 85 (2), pp. 196–200.Google Scholar
Alesina, A. and Summers, L. (1993), ‘Central bank independence and macroeconomic performance: some comparative evidence’, Journal of Money, Credit, and Banking, 25 (2), pp. 151–62.CrossRefGoogle Scholar
Alesina, A. and Tabellini, G. (2005), ‘Bureaucrats or politicians?’, revised draft (May 2005) of CEPR Discussion Paper No 4252, 2004.CrossRefGoogle Scholar
Barro, R.J. and Gordon, R. (1983a), ‘Rules, discretion and reputation in a model of monetary policy’, Journal of Monetary Economics, 12, pp. 101–21.CrossRefGoogle Scholar
Barro, R.J. and Gordon, R. (1983b), ‘A positive theory of monetary policy in a natural rate model’, Journal of Political Economy, 91, pp. 589–610.CrossRefGoogle Scholar
Berger, H. (1997), ‘The Bundesbank's path to independence: evidence from the 1950s’, Public Choice, 93, pp. 427–53.CrossRefGoogle Scholar
Berger, H. and Haan, J. de (1999), ‘A state within a state? An event study on the Bundesbank’, Scottish Journal of the Political Economy, 46, pp. 17–39.CrossRefGoogle Scholar
Berger, H., Haan, J. de and Eijffinger, S. (2001), ‘Central bank independence: an update of theory and evidence’, Journal of Economic Surveys, 15, pp. 3–40.CrossRefGoogle Scholar
Blinder, A.S. (1998), Central Banking in Theory and Practice, Cambridge, MA., MIT Press.Google Scholar
Brumm, H.J. (2000), ‘Inflation and central bank independence: conventional wisdom redux’, Journal of Money, Credit, and Banking, 32, pp. 807–19.CrossRefGoogle Scholar
Buiter, W.H. (2005), ‘New developments in monetary economics: two ghosts, two eccentricities, a fallacy, a mirage and a mythos’, The Economic Journal, 115, March, C1–C31.CrossRefGoogle Scholar
Campillo, M. and Miron, J.A. (1997), ‘Why does inflation differ across countries?’, in Romer, C.D. and Romer, D.H. (eds), Reducing Inflation: Motivation and Strategy, University of Chicago Press.Google Scholar
Cukierman, A. (1992), Central Bank Strategy, Credibility and Independence: Theory and Evidence, MIT Press, Cambridge, MA.Google Scholar
Cukierman, A., Kalaitzidakis, P., Summers, L. and Webb, S. (1993), ‘Central bank independence, growth, investment and real rates’, Carnegie-Rochester Conference Series on Public Policy, 39, pp. 95–145.CrossRefGoogle Scholar
Cukierman, A. and Lippi, F. (2005), ‘Endogenous monetary policy with unobserved potential output’, Journal of Economic Dynamics and Control, 29, pp. 1951–83.CrossRefGoogle Scholar
Cukierman, A. and Webb, S. (1995), ‘Political influence on the central bank: international evidence’, World Bank Economic Review, 9 (3), pp. 397–423.CrossRefGoogle Scholar
Debelle, G. and Fischer, S. (1995), ‘How independent a central bank should be?’ in Fuhrer, J.C. (ed.), Goals, Guidelines and Constraints facing Monetary Policymakers, Federal Reserve Bank of Boston Conference Series No. 38, pp. 195–221.Google Scholar
De Long, J.B. and Summers, L. (1992), ‘Macroeconomic policy and long-run growth’, Federal Reserve Bank of Kansas City Economic Review, fourth quarter, pp. 5–30.Google Scholar
ECB (2003), ‘The outcome of the ECB's evaluation of its monetary policy strategy’, ECB Monthly Bulletin, June, pp. 79–92.Google Scholar
Eggertson, G. and Le Borgne, E. (2005), ‘The politics of central bank independence: a theory of pandering and learning in government’, Federal Reserve Bank of New York Staff Reports No 205.Google Scholar
Ehrmann, M. and Smets, F. (2003), ‘Uncertain potential output: implications for monetary policy’, Journal of Economic Dynamics and Control, 27, pp. 1611–38.CrossRefGoogle Scholar
Eijffinger, S. and Haan, J. de (1996), ‘The political economy of central-bank independence’, Special Papers in International Economics No. 19, Princeton University.Google Scholar
Eijffinger, S., Schaling, E. and Hoebrichts, M. (1998), ‘Central bank independence: a sensitivity analysis’, European Journal of Political Economy, 14, pp. 73–88.CrossRefGoogle Scholar
Faust, J. (1996), ‘Whom can we trust to run the Fed? Theoretical support for the founders’ views’ Journal of Monetary Economics, 37, pp. 267–83.CrossRefGoogle Scholar
Forder, J. (1996), ‘On the assessment and implementation of ‘institutional’ remedies’, Oxford Economic Papers, 48 (1), pp. 39–51.CrossRefGoogle Scholar
Forder, J. (1999), ‘Central bank independence: reassessing the measurements’, Journal of Economic Issues, 33, pp. 23–40.CrossRefGoogle Scholar
Franzese, R.J. Jr. (1999), ‘Partially independent central banks, politically responsive governments, and inflation’, American Journal of Political Science, 43, pp. 681–706.CrossRefGoogle Scholar
Fratianni, M., Hagen, J. von and Waller, C. (1997), ‘Central banking as a political principal-agent model’, Economic Inquiry, pp. 378–93.CrossRefGoogle Scholar
Friedman, M. (1956), ‘The quantity theory of money, a restatement’, in Friedman, M. (ed.), Studies in the Quantity Theory of Money, Chicago, pp. 3–21.Google Scholar
Fuhrer, J.C. (1997), ‘Central bank independence and inflation targeting: monetary policy paradigms for the new millennium?’, New England Economic Review, 1/2, pp. 19–36.Google Scholar
Gaspar, V. and Smets, F. (2002), ‘Monetary policy, price stability and output gap stabilization’, International Finance, 5, pp. 193–211.CrossRefGoogle Scholar
Grilli, V., Masciandaro, D. and Tabellini, G. (1991), ‘Political and monetary institutions and public financial policies in the industrial countries’, Economic Policy, 6 (13), pp. 341–92.CrossRefGoogle Scholar
Haan, J. de and Kooi, W. (1999), ‘Does central bank independence really matter? New evidence for developing countries using a new indicator’, Journal of Banking and Finance, 24, pp. 643–64.Google Scholar
Hayo, B. (1998), ‘Inflation culture, central bank independence and price stability’, European Journal of Political Economy, 14, pp. 241–63.CrossRefGoogle Scholar
Hayo, B. and Hefeker, C. (2002), ‘Reconsidering central bank independence’, European Journal of Political Economy, 18, pp. 653–74.CrossRefGoogle Scholar
Issing, O. (1993), ‘Central bank independence and monetary stability’, Institute of Economic Affairs Occasional Paper No. 89, London.Google Scholar
Issing, O. (2002), ‘On macroeconomic policy coordination in EMU’, Journal of Common Market Studies, (40) 2, pp. 345–58.CrossRefGoogle Scholar
Issing, O. (2003), Background Studies for the ECB's Evaluation of its Monetary Policy Strategy, Frankfurt am Main, European Central Bank.Google Scholar
Issing, O. (2005), ‘Why did the Great Inflation not happen in Germany?’, Federal Reserve Bank of St. Louis Review, 87 (2), March/April, Part 2, pp. 329–36.Google Scholar
Issing, O., Gaspar, V., Angeloni, I. and Tristani, O. (2001), Monetary Policy in the Euro Area. Strategy and Decision-making at the European Central Bank, Cambridge University Press.CrossRefGoogle Scholar
Jacome, L.I. and Vazquez, F. (2005), ‘Any link between legal central bank independence and inflation? Evidence from Latin America and the Caribbean’, IMF Working Paper No 05/75, April.CrossRefGoogle Scholar
Kydland, F.E. and Prescott, E.C. (1977), ‘Rules rather than discretion: the inconsistency of optimal plans’, Journal of Political Economy, 85, pp. 473–91.CrossRefGoogle Scholar
Lohmann, S. (1992), ‘Optimal commitment in monetary policy: credibility versus flexibility’, American Economic Review, 82, pp. 273–86.Google Scholar
Loungani, K.P. and Sheets, N. (1997), ‘Central bank independence, inflation, and growth in transition economies’, Journal of Money, Credit, and Banking, 29, pp. 381–99.CrossRefGoogle Scholar
Maier, P. and Knaap, T. (2002), ‘Who supported the Deutsche Bundesbank? An empirical investigation’, Journal of Policy Modeling, 24, pp. 831–51.CrossRefGoogle Scholar
Mangano, G. (1998), ‘Measuring central bank independence: a tale of subjectivity and of its consequences’, Oxford Economic Papers, 50, pp. 468–92.CrossRefGoogle Scholar
McCallum, B.T. (1995), ‘Two fallacies concerning central-bank independence’, American Economic Review, Papers and Proceedings, 85, pp. 207–11.Google Scholar
Meltzer, A.H. (2005), ‘Origins of the Great Inflation’, Federal Reserve Bank of St. Louis Review, 87 (2), March/April, Part 2, pp. 145–76.Google Scholar
Muscatelli, V.A., Tirelli, P. and Trecroci, C. (2000), ‘Does institutional change really matter? Inflation targets, central bank reform and interest rate policy in the OECD countries’, CESifo Working Paper No 278.Google Scholar
Neumann, M.J.M. (1996), ‘Problems in measuring central bank independence’, University of Bonn Discussion Paper B352.Google Scholar
Neumann, M.J.M. (1998), ‘Geldwertstabilität: Bedrohung und Bewährung’, in Deutsche Bundesbank (ed.), Fünfzig Jahre Deutsche Mark: Notenbank und Währung in Deutschland seit 1948, Munich, pp. 309–46.Google Scholar
Orphanides, A. (2001), ‘Monetary policy rules based on real-time data’, American Economic Review, 91 (4), pp. 964–85.CrossRefGoogle Scholar
Orphanides, A. and Williams, J.C. (2004), ‘Robust monetary policy with imperfect knowledge’, presented at the Conference on Monetary Policy and Imperfect Knowledge, Würzburg, 14–15 October.CrossRefGoogle Scholar
Orphanides, A. and Williams, J.C. (2005), ‘Inflation scares and forecast-based monetary policy’, Review of Economic Dynamics, 8, pp. 498–527.CrossRefGoogle Scholar
Persson, T. and Tabellini, G. (1993), ‘Designing institutions for monetary stability’, Carnegie-Rochester Conference on Public Policy, 39, pp. 53–84.CrossRefGoogle Scholar
Posen, A. (1993), ‘Why central bank independence does not cause low inflation. There is no institutional fix for politics’, in O'Brien, R. (ed.), Finance and the International Economy 7, Oxford University Press.Google Scholar
Posen, A. (1995), ‘Declarations are not enough: financial sector sources of central bank independence’, NBER Macroeconomic Annual, pp. 253–78.CrossRefGoogle Scholar
Rogoff, K. (1985), ‘The optimal degree of commitment to an intermediate monetary target’, Quarterly Journal of Economics, 100, pp. 1169–89.CrossRefGoogle Scholar
Romer, C.D. (2005), Commentary, Federal Reserve Bank of St. Louis Review, 87 (2), March/April, Part 2, pp. 177–86.Google Scholar
Romer, C.D. and Romer, D.H. (1998), ‘Monetary policy and the well-being of the poor’, NBER Working Paper No 6793.CrossRefGoogle Scholar
Simons, H. (1936), ‘Rules versus authorities in monetary policy’, Journal of Political Economy, pp. 175–76.CrossRefGoogle Scholar
Spiegel, M.M. (1998), ‘Central bank independence and inflation expectations: evidence from British index-linked gilts’, Federal Reserve Bank of San Francisco Economic Review, 1, pp. 3–14.Google Scholar
Stella, P. (2005), ‘Central bank financial strength, transparency, and policy credibility’, IMF Staff Papers, 52 (2), pp. 335–65.Google Scholar
Svensson, L. (1997), ‘Optimal inflation targets, ‘conservative’ central banks, and linear inflation contracts’, American Economic Review, 87, pp. 98–114.Google Scholar
Temple, J. (1998), ‘Central bank independence and inflation: good news and bad news’, Economic Letters, 61, pp. 215–19.CrossRefGoogle Scholar
Waller, C. (1989), ‘Monetary policy games and central bank politics’, Journal of Money, Credit, and Banking, pp. 422–31.CrossRefGoogle Scholar
Waller, C. (1992), ‘A bargaining model of partisan appointments to the central bank’, Journal of Monetary Economics, pp. 411–28.CrossRefGoogle Scholar
Waller, C. and Walsh, C.E. (1996), ‘Central-bank independence, economic behaviour, and optimal term lengths’, American Economic Review, pp. 1139–53.Google Scholar
Walsh, C.E. (1995), ‘Optimal contracts for central bankers’, American Economic Review, 85, pp. 150–65.Google Scholar
Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.Google Scholar