The political economy of central-bank independence (original) (raw)

In recent years, academics and policymakers have shown increasing interest in the independence of central banks with respect to the formulation of monetary policy. In the European Union, this interest was realized in the Treaty on European Union (Maastricht Treaty), according to which the European Central Bank will have complete autonomy in conducting the common monetary policy of the European Union. Hungary, the Czech Republic, and several other countries in Central Europe have decided on autonomy for their central banks. In most of the Anglo-Saxon countries, the issue continues to be discussed. Public debate in the United Kingdom seems to lean toward more independence for the Bank of England; the Congress in the United States continues to question the autonomy of the Federal Reserve. This paper analyzes from various perspectives the advantages and disadvantages of central-bank independence and discusses the theoretical and empirical arguments in favor of autonomy. It reviews and criticizes generally accepted indices of central-bank independence, investigates the determinants of independence, and, ultimately, tries to decide whether or not an independent central bank is, in practice, desirable. We wish to acknowledge a number of colleagues for their many helpful comments and suggestions on previous drafts of this paper. We are especially grateful to Onno