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Cambridge Journal of Economics 28:549-576 (2004)
Cambridge Journal of Economics, Vol. 28, No. 4, © Cambridge Political Economy Society 2004; all rights reserved

Reflections on the current fashion for central bank independence

Jörg Bibow*

Address for correspondence: Jörg Bibow, Franklin College, via Ponte Tresa 29, 6924 Sorengo (Lugano), Switzerland; email: joerg.bibow{at}t-online.de

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 vs discretion debate, but also posits an implausible view of monetary policy. Most worryingly, the inflationary bias featured prominently in the time-inconsistency literature has encouraged the development of a dangerously one-sided approach to central bank independence which entirely ignores the potential risks involved in maximising central bankers' latitude for discretion. The analysis shows that a more balanced and symmetric approach to central bank independence is urgently needed. 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 and empirical evidence.

Key Words: Time inconsistency • Central bank independence • Monetary policy • Rules vs discretion • Credibility

JEL classifications: E50, E58

Manuscript received April 23, 2001; final version received July 8, 2002.


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 OXF ECON PAPHome page
S.-O. Daunfeldt and X. de Luna
Central bank independence and price stability: evidence from OECD-countries
Oxf. Econ. Pap., July 1, 2008; 60(3): 410 - 422.
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