Independent or lonely? Central banking in crisis

Deborah Mabbett and Waltraud Schelkle

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The financial crisis has called our understanding of central bank independence (CBI) into question. Central banks were praised for bold interventions but simultaneously criticized for overreaching their mandates. Central bankers themselves have complained that they are ‘the only game in town’. We develop the second generation theory of CBI to understand how independence can turn into loneliness when a financial crisis calls for cooperation between fiscal authorities and the central bank. Central banks are protected from interference when there are multiple political veto-players, but the latter can also block cooperation. Furthermore, central banks in multi-veto-player systems operate under legal constraints on their financial stabilization actions. They can circumvent these constraints, but this invites criticism and retribution. More surprisingly, central banks have strategically invoked their constraints to gain cooperation from political authorities.

Keywords: central bank independence; delegation; financial crisis; monetary policy; veto-players; strategic agents (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2019
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

Published in Review of International Political Economy, 2019, 26(3), pp. 436 - 460. ISSN: 0969-2290

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:90879

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