Central Bank Independence Revisited

24 Pages Posted: 8 Feb 2018

See all articles by G.C. Harcourt

G.C. Harcourt

UNSW Australia Business School, School of Economics

Peter Kriesler

UNSW Australia Business School, School of Economics

Joseph Halevi

The University of Sydney - Department of Political Economy; International University College (IUC) of Turin

Date Written: January 11, 2018

Abstract

In major advanced economies, including Australia, independent central banks have become established institutions. Yet there are reasons why the sustained presence of such an institution in a democratic society should be challenged. This paper considers the arguments usually advanced for central bank independence, and the underlying arguments for a failure of democracy including the standard argument based on the importance of central bank credibility. This argument depends crucially on the role of inflationary expectations on the actual inflation rate. We question whether the standard story is really relevant – and, if not, then independence depends on the argument that politicians may not always act in the best long-term interests of their constituencies but bankers are more likely to. We show that this is a questionable assumption. The post World War 2 development of Europe and the emergence of the European Central Bank is examined to illustrate our underlying proposition that Central bank independence is not the result of economic argument, but of political ones leading to suboptimal economic results.

Keywords: Central Bank Independence, Democracy, European Central Bank, Inflation, Inflationary Expectations

JEL Classification: E58, E50, G20

Suggested Citation

Harcourt, G.C. and Kriesler, Peter and Halevi, Joseph, Central Bank Independence Revisited (January 11, 2018). UNSW Business School Research Paper No. 2018-01. Available at SSRN: https://ssrn.com/abstract=3120107 or http://dx.doi.org/10.2139/ssrn.3120107

G.C. Harcourt

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Peter Kriesler (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Joseph Halevi

The University of Sydney - Department of Political Economy ( email )

Merewether Building (H04)
Sydney, 2006
Australia

International University College (IUC) of Turin ( email )

Piazza Carlo Felice, 18
Torino, 10121
Italy

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