Reflections on the Current Fashion for Central Bank Independence

Jerome Levy Economics Institute Working Paper No. 334

14 Pages Posted: 16 Aug 2001

See all articles by Jörg Bibow

Jörg Bibow

Skidmore College - Department of Economics; Bard College - Levy Economics Institute

Date Written: July 2001

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.

Suggested Citation

Bibow, Jörg, Reflections on the Current Fashion for Central Bank Independence (July 2001). Jerome Levy Economics Institute Working Paper No. 334, Available at SSRN: https://ssrn.com/abstract=280303 or http://dx.doi.org/10.2139/ssrn.280303

Jörg Bibow (Contact Author)

Skidmore College - Department of Economics ( email )

Saratoga Springs, NY 12866
United States

Bard College - Levy Economics Institute ( email )

Blithewood Rd
Annandale on Hudson, NY 12504
United States