Home > Uncategorized > Central bank independence — institutionalizing monetary handcuffs

Central bank independence — institutionalizing monetary handcuffs

from Lars Syll

hqb813cpgmtyImposing a hard target can bind the central bank, but the government must then act on failures to hit the target. Why would it if it is self-interested? If it does, that amounts to saying it is not selfish, which undermines the argument that independence is needed. The same argument can be used to deconstruct independence itself. Suppose independence is a solution to time inconsistency. Why would a selfish politician ever agree to independence in the first place? If they did, that would be tantamount to saying they are not selfish, in which case independence is not needed. In other words, only non-self-interested politicians choose independence, making independence redundant …

Even if the banker is honest, there still remains the fundamental question of why would selfish politicians go against their own interests and appoint a conservative independent central banker? Doing so is tantamount to proving they are not selfish, in which case there is no need for an independent central bank. That microeconomic contradiction suggests something else is going on with the shift to central bank independence. By definition, selfish politicians cannot be authorizing it out of public interest. Instead, they are doing so out of self-interest, which is the clue to understanding the real reasons for the shift to central bank independence … That implies central bank independence is not the socially benevolent phenomenon mainstream economists and central bankers claim it to be. Instead, somewhat obviously, it is a highly political development serving partisan interests …

The real issues are why do independent banks go after inflation harder, and what is the role of independence?

The reason they go after inflation harder is they are aligned with capital. That is because capital is politically in charge and sets the goals for central banks. It is also because central bankers and their economic advisers have bought into the Chicago School monetary policy framework which implicitly sides with capital (i.e. views the problem as being inflation prone government). That explains why there is central bank independence …

Democratic countries may still decide to implement central bank independence, but that decision is a political one with non-neutral economic and political consequences. It is a grave misrepresentation to claim independence solves a fundamental public interest economic problem, and economists make themselves accomplices by claiming it does.

Thomas Palley

  1. lobdillj
    September 14, 2019 at 2:08 pm

    “capital is politically in charge and sets the goals for central banks” … Hello?

  2. Ken Zimmerman
    September 15, 2019 at 2:26 am

    Never forget, in our world the interests of capital (or, if you prefer, the 1%) are the public interest. There is no other public interest. That inclination is what got the world into its current screwed up mess. So, who and how created that inclination, and sold it like donuts?

  3. lobdillj
    September 15, 2019 at 4:31 pm

    Schemers scheme, liars lie, and swindlers swindle. For my money (Ha, ha!) Hudson’s “Killing the Host” lays it all out beautifully.

    • Craig
      September 15, 2019 at 6:37 pm

      Yes, it is no coincidence that all of the leading reform movements are MMT, Hudson’s financial parasitism, Public Banking and Keen’s disequilibrium/Minsky financial instability.

      “It’s the monetary paradigm, stupid.”

  4. Helen Sakho
    September 16, 2019 at 12:55 am

    Poor banks! They are feeling nervous again. Shame on the poor clients worldwide that cannot repay their debts, live in constant fear of further poverty and fail to bail them out.

  5. ghholtham
    September 16, 2019 at 11:38 am

    Central bank independence is now becoming controversial after years of being unchallenged orthodoxy. In fact the argument for it was always weak. The advantages of “credibility” in policies to control inflation were overplayed. Empirically the advantage of credibility was extremely small: the Bundesbank had to deflate the German economy to control inflation just like less “credible” central banks. Meanwhile the cost of independence was the inability to co-ordinate fiscal and monetary policy. This becomes starkly obvious at a time of deficient aggregate demand. The present contortions of quantitative easing and negative interest rates are both ineffective and distortionary – all because the authorities cannot simply agree to monetize a budget deficit for as long as prudently necessary. Other correspondents to this blog scent conspiracy. While ideology undoubtedly played a role, lousy and mistaken analysis also played a part.

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