Central Bank Independence Revisited

Peter Kriesler, Geoffrey Harcourt and Joseph Halevi ()
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Joseph Halevi: University of sydney

No 2018-01, Discussion Papers from School of Economics, The University of New South Wales

Abstract: In major advanced economies, including Australia, independent central banks have become established institutions. Yet there are reasons why the sustained presence of such an institution in a democratic society should be challenged. This paper considers the arguments usually advanced for central bank independence, and the underlying arguments for a failure of democracy including the standard argument based on the importance of central bank credibility. This argument depends crucially on the role of inflationary expectations on the actual inflation rate. We question whether the standard story is really relevant – and, if not, then independence depends on the argument that politicians may not always act in the best long-term interests of their constituencies but bankers are more likely to. We show that this is a questionable assumption. The post Wold War 2 development of Europe and the emergence of the European Central Bank is examined to illustrate our underlying proposition that Central bank independence is not the result of economic argument, but of political ones leading to suboptimal economic results.

Keywords: Central bank independence; democracy; European Central Bank; inflation; inflationary expectations (search for similar items in EconPapers)
JEL-codes: E50 E58 G20 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2018-01
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac, nep-mon and nep-pke
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