Will central bank independence withstand political pressure?

Charles Goodhart and Manoj Pradhan

Chapter 1 in Central Banking, Monetary Policy and Social Responsibility, 2022, pp 20-34 from Edward Elgar Publishing

Abstract: A key reason for the widespread introduction of Central Bank independence (CBI) was the belief that politicians would often defer raising interest rates needed to maintain price stability for electoral reasons. So, CBI was expected to lead to frequent conflicts between Ministers of Finance and Central Bankers. In the event, the opposite occurred. Underlying disinflationary forces, notably demography and globalisation, led to strong downwards trends in interest rates, allowing massively rising public sector debt to coincide with stable, or even falling, debt service ratios. But these prior disinflationary forces are now reversing sharply, causing structural and persistent upwards inflationary pressures, a process accelerated by Covid. In this new context, we present three scenarios illustrating how Central Banks and politicians might react.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2022
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