A Post Keynesian Perspective on the Rise of Central Bank Independence: A Dubious Success Story in Monetary Economics
Levy Economics Institute of Bard College Working Paper No. 625
33 Pages Posted: 14 Oct 2010
Date Written: October 13, 2010
This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.
Keywords: Central Banks, Central Bank Independence, Democratic Accountability, Monetary Policy, Time-inconsistency
JEL Classification: B31, B59, E02, E50, E61
Suggested Citation: Suggested Citation