Reflections on the Current Fashion for Central Bank Independence

Jörg Bibow

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper challenges the time-inconsistency case for central bank independence. It argues that the time-inconsistency literature not only seriously confuses the substance of the rules versus discretion debate, but also posits an implausible view of monetary policy. Most worrisome, the inflationary bias featured prominently in the time-inconsistency literature has encouraged the development of a dangerously one-sided approach to central bank independence that entirely ignores the potential risks involved in maximizing central bankers' latitude for discretion. The analysis shows that a more balanced and symmetric approach to central bank independence is urgently warranted. The views of Maynard Keynes and Milton Friedman are shown to shed some illuminating and disconcerting light on a fashionable free-lunch promise that is based on rather shallow theoretical foundations.

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Related works:
Journal Article: Reflections on the current fashion for central bank independence (2004)
Working Paper: Reflections on the Current Fashion For Central Bank Independence (2001)
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