Central Bank Independence Revisited: After the financial crisis, what should a model central bank look like? by Ed Balls, James Howat and Anna Stansbury published by Harvard Kennedy School (2016).
“In the aftermath of the global financial crisis, countries around the world have dramatically expanded the objectives and powers of central banks beyond their traditional inflation targets and policy rates. But as these unelected, technocratic, institutions become increasingly powerful, the pre-crisis academic consensus around central bank independence – put crudely, ‘the more, the better’ – has become inadequate. Absolutist interpretations of complete central bank independence may both undermine the pursuit of new central bank objectives and fray the political support that currently exists for central bank autonomy in their core monetary policy function. Indeed, popular discontent towards central banks is growing in the US, UK and the euro-zone. We need a more nuanced approach to central bank independence in this brave new world.
There are elements of the pre-crisis consensus that must be protected. We show that operational independence of central banks – the ability to choose an instrument to achieve inflation goals – has been associated with significant improvements in price stability. But, in advanced economies at least, political independence – the absence of any possibility for politicians to influence central bank goals or personnel – is not correlated with inflationary outcomes. In order to protect their popular legitimacy, central banks in advanced economies can therefore sacrifice some political independence without undermining the operational independence that is important in both their monetary policy and financial stability functions..”
