Central bank independence — institutionalizing monetary handcuffs

8 Sep, 2019 at 12:23 | Posted in Economics | 5 Comments

hqb813cpgmtyImposing a hard target can bind the central bank, but the government must then act on failures to hit the target. Why would it if it is self-interested? If it does, that amounts to saying it is not selfish, which undermines the argument that independence is needed. The same argument can be used to deconstruct independence itself. Suppose independence is a solution to time inconsistency. Why would a selfish politician ever agree to independence in the first place? If they did, that would be tantamount to saying they are not selfish, in which case independence is not needed. In other words, only non-self-interested politicians choose independence, making independence redundant …

Even if the banker is honest, there still remains the fundamental question of why would selfish politicians go against their own interests and appoint a conservative independent central banker? Doing so is tantamount to proving they are not selfish, in which case there is no need for an independent central bank.
That microeconomic contradiction suggests something else is going on with the shift to central bank independence. By definition, selfish politicians cannot be authorizing it out of public interest. Instead, they are doing so out of self-interest, which is the clue to understanding the real reasons for the shift to central bank independence … That implies central bank independence is not the socially benevolent phenomenon mainstream economists and central bankers claim it to be. Instead, somewhat obviously, it is a highly political development serving partisan interests …

The real issues are why do independent banks go after inflation harder, and what is the role of independence?

The reason they go after inflation harder is they are aligned with capital. That is because capital is politically in charge and sets the goals for central banks. It is also because central bankers and their economic advisers have bought into the Chicago School monetary policy framework which implicitly sides with capital (i.e. views the problem as being inflation prone government). That explains why there is central bank independence …

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.

Thomas Palley


  1. Some interesting points made here by Palley on the political fallout which can be directed squarely at neo-classical economics, neo-liberalism and Model. The connection between capital and central banks is subtle but real. Really we are talking about a nexus between MIT, Goldman Sachs and central banks. The BOE ais a revolving door with Goldman Sachs London. Three of the six BOE governors are ex Goldman Sachs. Goldman Sachs does the reverse – it poaches from the BOE. Since the BOJ was made independent it is now common for its staff to work at Goldman Sachs – the new ‘amakudari’. Draghi went to MIT. Barroso is now at Goldman Sachs (yes neo-liberalism and capital have infiltrated the Commission as well.)

    Personally though I found Applebaum the more convincing article. There is not necessarily a neo-liberal conspiracy among economists. It is just that they have not had the training and broadness of education to properly push an intellectual defence against it. Instead they stick to classical foundations and add frictions and ‘market imperfections’. But at heart, they see an economy as basically a classical market system.

    As always I found Monbiot good:


    • I am not suggesting that Palley argues there is a conspiracy either – I’m not sure why I used that word. He rightly points out that their belief that there is an inflationary bias among government’s naturally is a natural consequence of buying into classical and New-classical methodology and ideology (the latter made stark clear in Sargent’s incredibly ignorant “Four Inflations” article).

      I would argue further that this is a natural consequence of basing analysis around models poorly informed by facts, and neo-classical models in particular.

      And he rightly highlights the tautologies: why would Blair make a central bank independent to demonstrate his anti-inflation credentials to capital and mainstream economists if governments wish to inflate through monetary policy?

      Also austerity policies around the world should put to rest any assertions that governments have an inflationary bias.

  2. It would be very pertitent to quote from Milton Friedman who was not a fan of central bank independence. Milton Friedman (1962, p. 219) noted that “… money is too important to be left to the central bankers”. Two decades later, he elaborated his concerns as follows:
    The political objections are perhaps more obvious than the economic ones. Is it really tolerable in a democracy to have so much power concentrated in a body free from any direct political control? … One economic defect of an independent central bank … is that it almost invariably involves dispersal of responsibility… Another defect … is the extent to which policy is … made highly dependent on personalities… A third technical defect is that an independent central bank will almost invariably give undue emphasis to the point of view of bankers… The defects I have outlined constitute a strong technical argument against an independent central bank (Friedman, 1985, p. 8).
    Friedman, M. (1962). Should there be an Independent Monetary Authority? In L.B. Yeager (Ed.), In Search of a Monetary Constitution (pp. 219-43). Cambridge, MA: Harvard University Press.
    Friedman, M. (1985). The Case for Overhauling the Federal Reserve. Challenge, July-August, pp. 4-12.

    • Very interesting quotes. Thanks!

  3. This is my page about a new theory macroeconomic conception monetary system https://www.facebook.com/notes/528952320466883/ , #macroeconomicsustainable ,and any reply are well accepted : i wrote about this on “riodialogues”(exposed better in the note https://www.facebook.com/notes/teoria-della-compensazione-della-massa-monetaria/bozza-espositiva-/228248770537241 :I suppose a new rule(through new legislation) for Central Bank: when one of the central bank have a new emission of money whith each rate the same bank print corrispective quantity of money of the rate ,out of budget,and give for free this quantity ,to compense the monetary mass ,at a pubblic commission that use for pubblic necessity etc etc…we resolve three problem :pubblic necessity,pubblic budget,and market crisis,;for example : the C. B. have a emission of hundred billion unit and fix a rate of 3% and give this money to commercial bank,at the same moment print 3 billion and give these to pubblic commission(ONU?) that spend for pubblic problem #quantitativefree……at the end the commercial bank retourns 103 billions and the C.B .budget is ok ..whithout problem of failure of monetary mass….) http://www.facebook.com/pages/Teoria-della-compensazione-della-massa-monetaria/137335536277534

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