Do We Really Need Central Bank Independence? A Critical Re-Examination

University of Basel WWZ Working Paper No. 01/03

33 Pages Posted: 13 Apr 2001

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Carsten Hefeker

HWWA Institute of International Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: March 2001

Abstract

In this survey, we critically review the argument for central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, CBI should not be treated as an exogenous variable, but instead attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems. Third, in a number of empirical studies, researchers found CBI is correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there is no reason to believe the correlation between CBI and low inflation tells us anything about causality.

Keywords: Central bank independence, monetary policy

JEL Classification: E58, E52

Suggested Citation

Hayo, Bernd and Hefeker, Carsten, Do We Really Need Central Bank Independence? A Critical Re-Examination (March 2001). University of Basel WWZ Working Paper No. 01/03. Available at SSRN: https://ssrn.com/abstract=264454 or http://dx.doi.org/10.2139/ssrn.264454

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Carsten Hefeker

HWWA Institute of International Economics ( email )

Heimhuder Strasse 71
20347 Hamburg, DE Hamburg 20148
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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