The Future of Central Bank Independence

====================================================================

Question 1: Do you agree that central bank independence in the Eurozone and the UK will decline over the next 48 months?

====================================================================

====================================================================

Question 2: Do you agree that the traditional argument that less central bank independence leads to higher inflation will (still) be relevant over the next 48 months in Western economies?

====================================================================

====================================================================

Question 3: More generally, do you agree that it is desirable to maintain central bank independence? Again focus on the near future, say next 48 months.

====================================================================

Summary

The December 2016 expert survey of the Centre for Macroeconomics (CFM) and the Centre for Economic Policy Research (CEPR) invited views on whether the era of central bank independence is drawing to a close, particularly in Europe. When asked whether there will be significant changes in the independence of monetary policy in the UK and the Eurozone in the foreseeable future, only 31 of the 70 respondents disagreed with this statement.

The survey also reveals that what has long been a well-established proposition among economists that a reduction in central bank independence will lead to higher inflation is no longer taken for granted: less than half of the panel members agree with this view. But on the normative question of the desirability of maintaining central bank independence, the experts are almost unanimous that it remains desirable.

Background

Over the past 30 years, most central banks across the advanced economies have been given the ability to conduct monetary policy independently from interference by fiscal and political authorities (Crowe and Meade 2007). Today, almost all central banks in OECD countries are operationally instrument-independent, counting on their own tools to set or target several interest rates, even if none of them is goal-independent, since political bodies give them their mandate.

Closely related to central bank independence has been the adoption of inflation targeting as a policy framework, whereby central banks announce their target for inflation in the near or medium term, and transparently describe their different policy choices with respect to the target (Svensson 2010). 

Empirical work has measured independence using a variety of different indicators. The more commonly used include:

  1. the rules for appointment and dismissal of central bank governors;
  2. the extent to which the government or fiscal authorities must be consulted before monetary policy decisions;
  3. whether the goals of the central bank are wide-ranging or tightly focused on what the central bank can achieve;
  4. and the ability of the central bank to finance its operations without relying on the government.

Research has also emphasised the importance of transparency and accountability of the central bank, the ability of the central bank to use its balance sheet, and the extent to which the central bank counts on fiscal backing and the rules for distribution of its revenues (Reis 2013). As a result, central bank independence is not a binary outcome of either independent or not, but rather can increase or decrease in a more continuous fashion.

Empirical evidence has supported the institutional changes that have given central banks greater independence. An influential study by Alesina and Summers (1992) showed that central bank independence was associated with lower inflation on average, without any significant increase in unemployment or volatility. And summarising a long research literature on the topic, Cukierman (2008) said that ‘the evidence is consistent with the conclusion that inflation and actual [independence] are negatively related in both developed and developing countries.’

Partly driven by these results, the argument for independence has been extended to other realms of economic policymaking. For example, the International Monetary Fund (IMF 2016) documents 39 independent fiscal councils that publicly assess fiscal plans, budget forecasts, and policy implementation and performance.

At the same time, central banks have embraced, more or less reluctantly, roles for financial stability and the use of macroprudential policies, where some cooperation with other public authorities is needed and which have clear distributional implications. This has created institutional pressures for central banks to be less independent.

Will central bank independence continue?

In spite of an academic consensus on the value of central bank independence and a three-decades-long movement towards greater independence, there are some signs that this trend may reverse in the near term. The vice chair of the Federal Reserve, Stanley Fischer (2015) recently described the many current challenges to central bank independence.

As central banks have assumed wider responsibilities for financial stability, used unconventional instruments and acted with a great deal of discretion during the global financial crisis, these controversial choices have been subject to political scrutiny and disagreement (Cochrane and Taylor 2015). More recently, discussions of explicit fiscal measures by the central bank, such as helicopter drops of money, have led to increasingly critical voices of central banks as overstepping their mandates.

Some academics have even wondered whether central bank independence is already dead (Baldwin and Reichlin 2013). Among policymakers, Abenomics in Japan involved significant intervention by political authorities over the target and actions of the Bank of Japan. In the Eurozone, only 30% of Germans trust the European Central Bank (ECB), according to the Eurobarometer survey of public opinion, and the ECB’s rescue operations have led to questions about its independence (Reuters 2015).

In the UK, some commentators have been critical of governor Mark Carney’s involvement in the Brexit debate, and senior figures in both major political parties have written public pieces criticising the Bank of England’s independence (Balls et al. 2016; Hague 2016). These critiques by politicians receive much media coverage.[i]

Finally, in the United States, president-elect Donald Trump frequently criticised the Federal Reserve during the election campaign, and members of congress have argued that the House should have more oversight over the activities of the central bank. Some of these criticisms contradict each other, but together they form a tide of opinion questioning the independence of the central bank.

Can we expect the era of central bank independence to come to an end or at least to be modified in a substantial way? Is this possibility real not only in Japan but also in Europe? That is the focus of the first question in the CFM-CEPR expert survey. Given that our panel consists of economists based in Europe, who are thus most capable of understanding the political and institutional environment in Europe, the focus is on the ECB and the Bank of England.

====================================================================

Question 1: Do you agree that central bank independence in the Eurozone and the UK will decline over the next 48 months?

====================================================================

Seventy panel members answered this question. The panel members are roughly evenly divided, with a minority of 32% that either agrees or strongly agrees, a larger minority of 45% that either disagrees or strongly disagrees, and a large fraction of 22% that neither agrees nor disagrees. Given that central bank independence has been largely uncontroversial for a long period, it is remarkable that a substantial fraction of our experts now think that there could be serious changes in central bank independence.

In spite of the evenly distributed final responses, the comments made by the experts provide a more united view. Many of them acknowledge that there will be pressures challenging central bank independence. The disagreement mainly lies in whether the pressure will be strong enough and whether it will last long enough to make a difference. An exception is David Miles (Imperial College London) who argues that ‘some of what appear to be criticisms of central banks is not so much a threat to their independence but more a questioning of the goal they are set.

Several panel members point out that institutional aspects make it less likely that the independence of the ECB will be affected in the near future than the independence of the Bank of England. For example, Sean Holly (University of Cambridge) writes ‘according to the Maastricht Treaty “neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body.” Any such revision of the Treaty would require the agreement of all EU members, not just those part of the Euro Area. This is not going to happen over the next four years. … However, the case of the UK is a different matter. An Act of Parliament revoking Bank of England operational independence could go through Parliament in an afternoon.’

Some panel members believe that independence may also be affected by more subtle pressures. Lars Svensson (Stockholm University) points out that ‘One has to distinguish de jure and de facto central bank independence. I do not think de jure independence will decline in the next four years in the Eurozone and the UK. However, political pressure on central bank policy may increase, and that may marginally affect central bank policy, so in that sense de facto independence may decline somewhat.

Some respondents think that political pressures have already affected central bank independence. Jürgen von Hagen (Universität Bonn) argues that ‘Under President Draghi, the ECB’s independence has proven to be very low already in past years. The ECB has consistently done what was politically convenient.’ Similarly, Panicos Demetriades (University of Leicester) says that ‘the independence of central banks has been eroded through political capture of central bank boards and other indirect actions by governments.

Our experts distinguish three different reasons why central bank independence is currently being challenged.

The first reason is populism. Ricardo Reis (London School of Economics, LSE) writes ‘the rise of populism in the Western world in 2016, the recent electoral success of authoritarian politicians, and the public relations campaign against experts and knowledge, all point to pressure on attacking independent technocratic institutions and reducing their power, including the central bank.

At the same time, several panel members point out that political forces are hard to predict. Albert Marcet (Institut d’Analisi Economica, Barcelona) comments that ‘because of the crisis all institutions are in question, including central banks, but I doubt a clear constituency against their current role will emerge. But then, so many weird things have been happening in politics that who knows.’

The second reason for central bank independence being challenged is a changing landscape in terms of the overall economy and central banks’ responsibilities relative to the times when their independence took off. Martin Ellison (University of Oxford) notes that ‘the original rise in central bank independence was motivated by successful taming of inflation in the 1980s.

Andrew Mountford (Royal Holloway) goes even further, arguing that ‘central bank independence only makes sense within a mindset of a stable balanced economy where the only implication of too lax a credit policy is inflation.’ But times have changed and as Pietro Reichlin (LUISS, Università Guido Carli) remarks, ‘since 2008, the ECB’s objectives have expanded from inflation targeting to financial stability, prevention of speculative attacks on sovereign debt, liquidity provision to national banks in peripheral countries and quantitative easing.

Several panel members think that such changes will affect central bank independence. For example, Sylvester Eijffinger (Tilburg University) suggests that ‘the unprecedented size of the central bank balance sheets in the Eurozone and the UK has far-reaching implications for the financial dimension of central bank independence by the monetary financing of government debt undermining the credibility and independence of the central banks. The threat of fiscal dominance with monetary accommodation is particularly strong in developed countries (the Eurozone and the UK) with high public debt levels.’

More generally, Jagjit Chadha (National Institute of Economic and Social Research) points out that ‘Once the central bank gets involved in more than one objective, trade-offs may start to appear and some discussion of the social welfare function may be needed.’

The third reason for the challenge to independence is a loss of credibility due to recent policies that central banks have pursued. Several panel members choose strong wordings to characterise recent central bank actions and policies. For example, Fabrizio Coricelli (Paris School of Economics) says that ‘credibility of ECB policies is undermined by the past several years of erratic policy and several commitments to do “whatever it takes”.’

Patrick Minford (Cardiff Business School) argues that ‘central banks allowed a sizeable credit boom to develop in the run-up [to the financial crisis]; they failed to resolve the resulting contraction by providing sufficient liquidity to the banking system and the Lehman collapse resulted, triggering the acute crisis downturn; afterwards central banks coordinated around a massive regulatory backlash which prevented the recovery of credit and worsened the crisis recovery process badly. These actions have badly shaken confidence in central banks’ competence.

Is central bank independence still important for low and stable inflation?

Inflation has been running below target and is expected to do so in the near future, yet conventional theory (still) predicts that independent central banks setting interest rates are able to control inflation (Reis 2016). Because in most well specified models, inflation is the result of an interaction between monetary and fiscal policy, looking into the future, perhaps the way to have inflation rise is for fiscal policy to be more active, effectively reducing central bank independence (Sims 2016).

Theory and evidence (described in the background information above) indicate that giving independence to the central bank lowers inflation expectations and inflation itself. Most of the theoretical arguments are symmetric, suggesting that if central bank independence declines, inflation should rise.

At the same time, the symmetry comes from assuming linear models, but this may have been the result of modelling convenience. Moreover, the arguments rely on the effect of institutions on expectations, and there is enough uncertainty on how best to model expectations to not be overly confident that they will move symmetrically.

====================================================================

Question 2: Do you agree that the traditional argument that less central bank independence leads to higher inflation will (still) be relevant over the next 48 months in Western economies?

====================================================================

Seventy panel members answered this question. Again, the panel members seem divided with a minority of 34% that either disagrees or strongly disagrees and a larger minority of 48% that either agrees or strongly agrees. It is again remarkable that a proposition that has been taken for granted in the academic literature for a considerable period can no longer count on a clear majority.[ii]

The panel members who agree provide few comments and those who do mostly claim that traditional arguments still apply. For example, John Driffill (Birkbeck, University of London) writes that ‘the argument will remain relevant, despite weak demand in the Eurozone and Japan. If populist governments in the US or UK get more control of monetary policy, there may be no danger of higher inflation in the short run, but it would bring risks of inflation further into the future.

Sir Christopher Pissarides (LSE) argues that financial markets would be the first to react to any reduction in independence: ‘financial markets will interpret it as political meddling with inflation targets and will adjust inflation expectations upward. This will be immediately reflected in lower real interest rates.’

Those who disagree provide a wider range of arguments. Several experts point out that inflation is unlikely, even with central banks becoming less independent because of the weak state of the economy, and that it would take something else to trigger inflation. Jonathan Portes (King’s College London) says that ‘The traditional frame is increasingly irrelevant. Higher inflation has not been a problem – quite the opposite – in advanced economies for most of the last decade.’

Others argue that central banks’ influence on inflation is limited in the current state of the world. Per Krusell (Stockholm University) writes that ‘The difference is unlikely to be small, given that the central banks have shown limited ability to affect inflation in the current low-interest rate regime.’

A different set of arguments points to the interaction of independence with other features that would determine whether inflation rises or falls. Lars Svensson points to transparency: ‘it seems that pressure to deviate from the inflation target may be in either direction, not necessarily always to exceed the target. … central bank independence must be accompanied by sufficient central bank accountability to achieve the democratically determined objectives of monetary policy.’

Jordi Gali (Universitat Pompeu Fabra) comments on the role of fiscal policy as being more important: ‘A more expansionary fiscal policy, supported by monetary policy, would be a more suitable way to tighten labour markets and capacity and raise inflation where it needs to.’

Martin Ellison notes that political pressures do not always lead to more expansionary monetary policies as indicated by the traditional reasoning. He writes that ‘if central bank independence falls, then people like former Conservative Party leader William Hague will have more influence. He wants interest rates to rise to reward savers, but if this happens then inflation would actually turn out to be lower than it would be under a fully independent Bank of England.’

Similarly, John Muellbauer (University of Oxford) says ‘there are different counterfactuals, and the answer would then depend very much on the nature of the reduction in central bank independence. For example, if the ban on monetary finance of the fiscal authorities were removed, this might change the long-term inflation outlook. But if an independent ECB remained the guardian of when such monetary finance were offered, I see little reason why worries about inflation should increase.’

Is central bank independence desirable?

The institutional shift towards greater central bank independence followed a successful theoretical literature that began 40 years ago. The influential Nobel Prize-winning work of Kydland and Prescott (1977), followed by research by Barro and Gordon (1983), argued that if central banks were dependent on politicians, then there would be a bias towards higher inflation without any corresponding benefit. Politicians would be tempted to set looser policy and unexpectedly increase inflation in order to lower unemployment via the Phillips curve.

Aware of this temptation, people would have higher inflation expectations, which would lead to higher inflation without any gains in employment. Likewise, fiscal authorities would be tempted to inflate away the debt, leading to a large inflation premium paid on the borrowing costs of the government. Everyone would be better off if an independent authority were able to commit credibly to not increasing inflation, and central banks could be naturally designed with this goal.

Further arguments have been put forward for central bank independence over the years. For example, independent central banks are less prone to fund fiscal deficits via seigniorage, which is the common harbinger of hyperinflations (Cagan 1956).

An independent central bank may also be the optimal answer to the political economy equilibrium between different public policy bodies with different expertise and effects on the income distribution (de Haan and Eijffinger 2016). In the Eurozone, the ECB’s independence is tied to independence from national policymakers, and further arguments for it are that it is able coordinate policies across countries and to internalise macroeconomic externalities across countries.

====================================================================

Question 3: More generally, do you agree that it is desirable to maintain central bank independence in the future?

====================================================================

On this normative question, the panel members responded with almost unanimity and great confidence. Of the 49 panel members who answered this question, 46 either agreed or strongly agreed. Only one neither agreed nor disagreed, another disagreed, and a third strongly disagreed.

Several experts mention the traditional argument that too much political influence will lead to expansionary policies that lead to higher inflation and at best some short-term increase in real activity. As Michael McMahon (University of Warwick) writes, ‘monetary policy independence should be maintained to avoid concerns that that government is trying to regain control of monetary policy for such manipulation.’

Francesco Lippi (Università di Sassari) points to the difference in horizon as a fundamental reason why independence must remain: ‘Central bank independence is useful because monetary policy decisions are for the medium run, a horizon for which the typical policymakers are not well equipped. The central bank’s ex-post accountability ensures the process remains ultimately accountable to the citizens.’

The discussion above makes clear that our experts think that there are serious challenges to central bank independence and that the current economic environment is quite different to the one that led to central bank independence.

Some repeat their desire for an improvement in current arrangements. Jordi Gali comments ‘Appointments of governors/presidents are still too partisan in many countries. Parliamentary hearings, possibly with the participation of external experts, and a significant multi-partisan support for a candidate, would be highly welcome.’ John Hassler (Stockholm University) writes that ‘It needs to be clarified that the broad measures with substantial fiscal components used during the Great Recession cannot permanently be in the hands of an independent central bank.’

Nevertheless, an overwhelming majority still favours central bank independence. Gali unequivocally states that ‘Central bank independence, combined with a high level of transparency and accountability, is in my view the best arrangement for advanced economies.’

Others argue that central bank independence has a proven track record. For example, Ricardo Reis says that ‘among all economic policymaking institutions in most advanced countries today, central banks tend to be the better prepared, the better informed, and make the more sensible decisions. Their success at keeping inflation close to targets in the past 15 years has been extraordinary. Their responses to the financial and debt crisis were, with all their flaws and shortcomings, still much better than that of almost all other policy institutions. I am worried that there has been too much discretionary policymaking, and too quick an embrace of financial stability as a goal that can be achieved by the central bank alone. But for now, the track record of independent central banks is very good.

In contrast, the very few who disagree reject the validity of independent institutions making choices with political consequences. Andrew Mountford argues that ‘the control of the amount of credit in the economy and the control of the banking sector more generally is intrinsically political. … The idea that control of this sector should be removed from government and thus ultimately from accountability to those that the system is supposed to work for (the general public) is economically ludicrous … and politically terrifying.

References:

Alesina, Alberto, and Lawrence Summers (1993), ‘Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence’, Journal of Money, Credit and Banking 25(2): 151-62.

Baldwin, Richard, and Lucrezia Reichlin, eds (2013), Is Inflation Targeting Dead? Central Banking After the Crisis, VoxEU ebook.

Balls, Ed, James Howat and Anna Stansbury (2016), ‘Central Bank Independence Revisited: After the Financial Crisis, What Should a Model Central Bank Look Like?’, Harvard Kennedy School Mossavar-Rahmani Centre for Business and Government Associate Working Paper No. 67.

Barro, Robert, and David Gordon (1983), ‘Rules, Discretion and Reputation in a Model of Monetary Policy’, Journal of Monetary Economics 12(1): 101–21. 

Cagan, Phillip (1956), ‘The Monetary Dynamics of Hyperinflations’, in Studies in the Quantity Theory of Money edited by Milton Friedman, University of Chicago Press.

Cochrane, John, and John Taylor (2016), Central Bank Governance And Oversight Reform, Hoover Institution.

Crowe, Christopher, and Ellen E. Meade (2007), ‘The Evolution of Central Bank Governance around the World’, Journal of Economic Perspectives 21(4): 69-90.

Cukierman, Alex (2008), ‘Central Bank Independence and Monetary Policymaking Institutions – Past, Present and Future’, European Journal of Political Economy 24(4): 722-36.

De Haan, Jakob, and Sylvester Eijffinger (2016), ‘The Politics of Central Bank Independence’, in Handbook of Public Choice, Oxford University Press. 

Fischer, Stanley (2016), ‘Central Bank Independence’, speech, 4 November.

Hague, William (2016) Central bankers have collectively lost the plot. They must raise interest rates or face their doom, The Telegraph 18 October.

IMF (2016) Fiscal Council Dataset.

Kydland, Finn, and Edward Prescott (1977), ‘Rules Rather than Discretion: The Inconsistency of Optimal Plans’, Journal of Political Economy 85(3): 473-92.

Reis, Ricardo (2013) ‘Central Bank Design’, Journal of Economic Perspectives 27(4): 17-44.

Reis, Ricardo (2016), ‘Funding Quantitative Easing to Target Inflation’, in Designing Resilient Monetary Policy Frameworks for the Future, Jackson Hole Economic Policy Symposium: Federal Reserve Bank of Kansas City. 

Reuters (2015), Cracks showing in Germany’s fragile truce with the ECB, 25 September.

Sims, Christopher (2016), ‘Fiscal Policy, Monetary Policy, and Central Bank Independence’, in Designing Resilient Monetary Policy Frameworks for the Future, Jackson Hole Economic Policy Symposium: Federal Reserve Bank of Kansas City. 

Svensson, Lars (2010), ‘Inflation Targeting’, in Handbook of Monetary Economics Volume 3B edited by Benjamin M. Friedman and Michael Woodford, Elsevier.

 

[ii] If we weigh the answers with self-assessed confidence, then the fraction that agrees or strongly agrees increases to 52%. If we exclude the panel members that neither agree nor disagree, then a majority of 60% agrees or strongly disagrees.

Contact us for more information

How the experts responded

Will central bank independence continue?

Participant Answer Confidence level Comment
Akos Valentinyi University of Manchester Disagree Extremely confident
Jagjit Chadha National Institute of Economic and Social Research Agree Not confident
I think it is a risk that because of a perception of poor economic performance and the increasing role of central banks in bank regulation, as well as clear involvement in fiscal policy through extraordinary monetary policies that the framework for independence in the operation of monetary policy will have to be rethought. One the central bank gets involved in more than objective, trade-offs may start to appear and some discussion on the social welfare function may be needed. (I considered some of these issues in this piece last month: http://www.niesr.ac.uk/blog/friday-flyer-dependence-day-old-lady#.WFZ7tGKLRdg)
John Driffill Birkbeck College, University of London Disagree Confident
Central bank independence has been --- is being -- challenged, as Central Banks have been drawn further into actions with clearer fiscal aspects, and further from a narrow technical role. But I expect them to defend their positions firmly. Trump may challenge the independence of the Fed in the coming months, but I expect the Fed to be able to reassert its independence as the inconsistencies in the Trump administration's policies and views become clearer.
Richard Dennis University of Glasgow Disagree Confident
Some aspect of central bank decisionmaking will surely come under closer scrutiny, as the goals and instruments given to central banks to undertake macroprudential policy are still in flux. However, I don't expect that there will be significant changes to central bank independence beyond this.
Mirko Wiederholt Goethe University Frankfurt Disagree Not confident
Lars E O Svensson Stockholm School of Economics Agree Not confident
One has to distinguish de jure and de facto central bank independence. I do not think de jure independence will decline in the next four years in the Eurozone and the UK. However, political pressure on central bank policy may increase, and that may marginally affect central bank policy, so in that sense de facto independence may decline somewhat.
Ray Barrell Brunel University London Disagree Not confident
It is unlikely that central bank independence will decline markedly in either the UK or the Euro Area in the next 48 months. In both cases significant changes would require legislation or even treaty change for the ECB, and this is unlikely to happen in such a short period. Increases in oil prices, and for the UK a devaluation, mean that inflation will rise toward target in both areas. Interest rates will follow upward, and quantitative easing will become much less prominent. Hence some of the political pressures for less independence will be diluted.
Stefan Gerlach BSI Bank Neither agree nor disagree Confident
The independence of monetary policy of the central banks in the EU is part of the Lisbon Treaty. It is to me unthinkable that the independence of the ECB will be changed. By contrast, it is quite possible that the Bank of England's independence will be reduced. For instance, if Brexit, when it happens, were to have severely negative economic effects on the economy, the government might want to have control of the levers of monetary policy.
Gernot Müller Eberhard-Karls-Universität Tübingen Disagree Not confident
Sean Holly Cambridge University Strongly disagree Extremely confident
According to the Maastricht Treaty "…neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body." Any such revision of the Treaty would require the agreement of all EU members, not just those part of the Euro Area. This is not going to happen over the next 4 years. The EU has enough (non-Brexit) issues to worry about. However, the case of the UK is a different matter. An Act of Parliament revoking Bank of England operational independence could go through Parliament in an afternoon. The question then is, who would determine monetary policy? Dincer and Eichengreen (2014, IJCB) using the Eijffinger and Geraats definition of the degree of transparency find that the more transparent a central bank is, the lower the variability of inflation. But there is no reason way an independent and transparent monetary policy should be decided by the central bank itself. From 1992 the UK followed inflation targeting but the actual decision about the stance of monetary policy was decided by HM Treasury with the Bank of England then required to use open market operations to bring this into effect. Only in 1997 was the Bank of England given operational independence. The question is however, would HM Treasury really want to be subject to the kinds of transparency that the Bank of England is obliged to follow in order to make the Bank more accountable? The transparency genie has been let out of the bottle. There can no longer be a return to old-fashioned monetary mystic. We could retain independence without decisions being made by the central bank. The central bank could take instructions from an independent Monetary Policy Committee.
Sushil Wadhwani Wadhwani Asset Management Agree Confident
Sir Christopher... London School of Economics Disagree Very confident
In the Eurozone I strongly disagree because (a) loss of independence means that someone else will have to take some of monetary policy making and there is no institution capable of doing that, (b) transfer of power to national central banks is incompatible with having a single currency, (c) loss of some independence inevitably means more German influence on monetary policy and many European nations would veto it outright. For the Bank of England it is less certain although I think it will not happen because the government does not seem to support it. But I expect the government to be careful to choose the next governor amongst the people who wholly support what it is doing and so follow its policies even from an "independent" platform
Harry Huizinga CentER, Tilburg University Disagree Confident
Jonathan Portes KIng's College, London Agree Not confident
Almost by definition this question asks for a political forecast more than an economic one; and the answer in turn depends primarily on political events. In the UK, decisions on monetary policy will inevitably be seen through the prism of the highly politicised Brexit debate so although the underlying framework is robust some degree of increased politicisation seems probable.
Michael McMahon University of Oxford Neither agree nor disagree Not confident
I agree that there will be continued pressure on central bank independence in both the UK and eurozone. However, I don't know how successful these political campaigns against central banks will be. The ECB already has strongly ingrained goal and instrument independence which is going to limit the scope to reduce independence. Moreover, while Balls, Howat and Stansbury (2016) argue that we now need some greater coordination with fiscal authorities when monetary policy is at, or near, its lower bound, this is difficult in the eurozone in the absence of a central fiscal authority.
John VanReenen London School of Economics Disagree Not confident
I think that they will both come under considerable political pressure. However, I believe the independence of these institutions is extremely important and needs to be protected. The rise of the populist right (and to a lesser extent left) is trying to undermine trust in such independent, expert institutions. This needs to be resisted. We need more such institutions, not less - see LSE Growth Commission http://www.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/lseGCrep-exec.pdf
Jonathan Temple University of Bristol Agree Not confident
Mike Elsby University of Edinburgh Disagree Confident
Andrew Mountford Royal Holloway Strongly agree Very confident
I hope so. The control of the amount of credit in the economy and the control of the banking sector more generally is intrinsically political. Central bank independence only makes sense within a mindset of a stable balanced economy where the only implication of too lax a credit policy is inflation. This mindset was never grounded in reality but recent events have shown just how wide of the mark this vision of the macroeconomy is. It is not just risk and financial crises that is missing. Major banks are global enterprises that are engaged in regulatory arbitrage, in channeling billions of dollars around the world in tax avoidance schemes - (Zucman, Piketty ) - thereby significantly weakening state capacity, and in funding political campaigns in favor of reduced regulation. The idea that control of this sector should be removed from government and thus ultimately from accountability to those that the system is supposed to work for (the general public) is economically ludicrous…..and politically terrifying. The economics literature on the independence of central banks has been about eliminating political influence on central banks. However, a more relevant independence is that between the regulators and the regulated. As an economist one of the most worrying aspects of the recent financial crises has been the seemingly great desire amongst policy makers and regulators to insure ex post those who made bad investments. If the market's incentive mechanisms are to work then those who lend to people or companies or governments who have little chance of paying the money back, must lose money. To understand the ease with which an ex-post insurance policy was implemented, it is surely not coincidental that many politicians, regulators and central bankers are ex-bankers and vice versa. For credible independence, working for a regulator or as a responsible politician should preclude one from ever working in the sector that you regulate or govern. Career paths must be uni-directional (no movement from regulator to regulated) if not entirely separate.
Pietro Reichlin Università LUISS G. Carli Agree Confident
Since 2008, the ECB objectives have expanded from inflation targeting to financial stability, prevention of speculative attacks on sovereign debt, liquidity provision to national banks in peripheral countries and quantitative easing. I see two problems with this super-activity. One is that the ECB's budget may be destabilized, creating a potential conflict with the objective of price stability. The other is that these policies have large distributional effects (creditors vs. borrowers) and they may create moral hazard. Both of these problems may put into question the benefit of the ECB independence and provide a powerful argument to those who think central banks should be subject to political supervision and control.
Simon Wren-Lewis University of Oxford Strongly disagree Very confident
In current circumstances criticism from Germany shows the ECB is doing its job. Given the centrality of CBI to the architecture of the Euro, the ECB is likely to remain the most independent central bank in the world. The criticism of the BoE has come from the same quarter as gave us Brexit, so their political influence will decline as the folly of Brexit becomes clearer.
David Bell University of Stirling Disagree Confident
Independence of the central bank is not the most pressing of the UK Government's problems. It cannot risk another major threat to its credibility during the period it is negotiating Brexit: the markets would exact a high price. Threats to the independence of the ECB will founder on the traditional inability of the EU states to agree on such a contentious step.
Ricardo Reis London School of Economics and Columbia University Agree Not confident
It depends, first and foremost, on political developments, which I am not competent to forecast. Yet, the rise of populism in the western world in 2016, the recent electoral success of authoritarian politicians, and the public relations campaign against experts and knowledge, all point to pressure on attacking independent technocratic institutions and reducing their power, including the central bank.
David Smith Sunday Times Agree Confident
The high watermark of central bank independence is behind us, and we can expect to see the political pressures on them increase, It is now customary for politicians to criticise them.
Volker Wieland Goethe University Frankfurt and IMFS Neither agree nor disagree Very confident
I don't think the question is well posed with regard to the timing. In the formal sense, the ECB is more independent than any other central bank as no single government or national electorate can change the treaty that defines its independence. Unanimous decision to change the treaty in the next 48 months is very unlikely. De facto, much independence has been lost by annnouncing or undertaking SMP, OMT and PSPP purchases of sovereign debt (in a monetary union with otherwise sovereign members.) Governments will continue to expect the ECB to help them out with regard to interest costs. Hence, the ECB will loose many of its current fans once the time comes that it has to stop buying or even start selling government debt to meet its (harmonized consumer price) inflation objective. Lacking the kind of popular support in national electorates that the Bundesbank enjoyed, civil servants in charge of central banking will find it rather difficult to stand up to elected heads of government and finance ministers.
Wendy Carlin University College London Neither agree nor disagree Confident
In spite of the use of QE, it appears that fiscal policy is needed to generate sufficient demand and, as a result, to raise inflation and inflation expectations to the CB's target. When the economy is at the ZLB, the credibility of the CB's inflation target is undermined. If fiscal policy is brought in to play to help bring inflation back up to target, this could be interpreted as reducing the CB's independence. Alternatively, it could be interpreted as recognition that the model of central bank independence is inadequate when the economy is mired at the ZLB.
Cédric Tille The Graduate Institute, Geneva Disagree Confident
Any change in independence would not materiallize so quickly.
Angus Armstrong National Institute of Economic and Social Research Agree Not confident
I do not expect an explicit change in the governance of central banks. However, since independence is granted by governments I expect that there may be some further acquiescence to government discussions, involvement and pressures. This could be significant if the politicians promises to those 'left behind' prove difficult to deliver by conventional fiscal means.
Giancarlo Corsetti University of Cambridge Disagree Very confident
Especially after the US elections, but also by virtue of the US cyclical improvement, there are widespread expectations of a change in global macroeconomic conditions. These changes will (and already) creating currency and interest rate adjustment and volatility. If inflation picks up in the US, a widespread objection to central bank 'independence' --- its alleged inability to move inflation expectations substantially --- will become less of an issue in some area of the world. It may be wise, nonetheless, to reconsider carefully the monetary framework. Many factors may keep full-employment real rates low or negative in the foreseeable future. Moreover, there will be challenges---as clearly pointed out by Stanley Fisher among others. Central Bank involvement in financial stability and bank supervision will however require institutional development, especially in Europe. This will unavoidably raise political issues. In Europe, the persistent fragmentation in economic and financial conditions and a poor macroeconomic stance in the euro area will unavoidably raise controversies around monetary stabilisation decisions.
Tryphon Kollintzas Athens University of Economics and Business Agree Very confident
I think that at low levels of inflation or deflation, especially in low or negative real growth situations, will cause politicians to interfere.
Robert Kollmann Université Libre de Bruxelles Disagree Confident
David Miles Imperial College Neither agree nor disagree Not confident
. I think that some of what appear to be criticisms of central banks is not so much a threat to their independence but more a questioning of the goals they are set. Those goal are generally set by governments. That distinction is obviously important.
Michael Wickens Cardiff Business School & University of York Neither agree nor disagree Not confident
In recent years many central banks have exceeded their mandate (eg the BoE and the ECB) by trading off their inflation target with targeting real variables such as unemployment and growth. As they have only one instrument and, in effect, two targets, this implies trading off the two and hence making political judgements. Being unelected, yet making political judgements it is only a matter of time before governments either have to alter their mandates or remind them of their primary task. The point about targeting inflation, the ususal mandate, is that a country with a floating exchange rate need a nominal anchor. This can be provided most effectively by delegating monetary policy to central banks. Allowing central banks to undertake broader macroeconomic policy when they don't have the tools is an abdication by government of macroeconomic management. There is no justification for this in the UK - even though the Treasury seems to have run down their macroeconomic expertise alarmingly and is probably no longer properly equipped to conduct macroeconomic policy. Their erroneous assessements about the effects of Brexit is a good example of this lack of expertise.
Pierpaolo Benigno Università LUISS G. Carli Agree Extremely confident
Central bank independence in the Eurozone is jeopardized by having entered in quasi-fiscal actions like the large-scale asset purchases. It is likely that next ECB President will be appointed on the basis of who is more favourable to continue or stop these purchases.
David Cobham Heriot Watt University Neither agree nor disagree Confident
Central bank independence in the UK has already been compromised, by the arrangements for QE and macro-pru, and by the appointment of Carney with the purpose of introducing forward guidance (because fiscal policy had been placed out of bounds for ideological reasons), so it's not clear that it will be further affected. In the Eurozone Draghi had to make repeated concessions to the austerity-obsessed German government (and public opinion), but he has now mase some progress, and again ti does not seem likely that the concessions or compromises need to go any further.
Morten Ravn University College London Neither agree nor disagree Not confident
Carney has been under a lot of pressure in the UK but has withstood the fire quite well and I think it would be difficult for UK policy makers to intervene directly or change the charter of the Bank of England. Such intervention would be associated with substantial loss of credibility. But, on the other hand, the circumvention of the fiscal rules in the UK did not get much press and is ignored by both economists and the press. So perhaps I overestimate credibility losses. The situation for the ECB is less clear although I think it is unlikely that there will be direct political intervention in the ECB's business. But, who knows? It is very hard to make forecasts especially about the future (Niels Bohr). Things are very uncertain at the moment. We don't know how Brexit will play out, what will happen in the US, and the fate of major European economies such as Italy and France. So, I would not totally eliminate the possibility that changes are coming but I think it is unlikely given the political costs from doing so.
Kate Barker British Coal Staff Superannuation Scheme Agree Not confident
Central banks may get blamed for economic problems, and so have their wings clipped, when there was little they could do to tackle them fundamentally, but central bankers wished to sound confident.
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Agree Not confident
To the extent that the current "extraordinary" policy measures persist over time, and that significant decisions continue to be made involving transfers of one sort or another (e.g. bank support) central decisions may be subject to growing political scrutiny and raise legitimate concerns. In that environment there may be pressures to limit the level of central bank independence. The pressures may intensify if the central bank is perceived make a serious mistake in some front, which has not been the case until now as far as I can tell.
Elias Papaioannou London Business School Strongly disagree Very confident
Central bank independence in the Eurozone will continue to be strong. However, politicians from all EZ member countries will continue criticizing ECB policies.
Martin Ellison University of Oxford Agree Not confident
The original rise in central bank independence was motivated by successful taming of inflation in the 1980s, a success that would have delighted Mervyn King in his long-held ambition for monetary policy to be boring. It didn’t turn out that way, as the pronouncements of “rock star” central bankers such as Greenspan, Bernanke, Draghi and Carney continued to dominate the economic news agenda. But this cult of the expert was inevitably destined for a populist fall, as seen in the US presidential election and Michael Gove’s “Britain has had enough of experts” during the Brexit referendum. The worry is that central bank independence has not been fully institutionalised, but rather has rested on the strong personalities of central bankers. The taking on of additional responsibilities by central banks and the blurring of the boundaries between monetary and fiscal policy can only add to the pressures on central bank independence. I take some comfort from the decision by Governor Carney to remain at the Bank of England until June 2019, by which time Britain may have rediscovered its taste for experts.
Giuseppe Bertola Università di Torino Agree Not confident
A lot depends on how independence is defined and measured
Jim Malley University of Glasgow Neither agree nor disagree Not confident
Paul De Grauwe London School of Economics Disagree Confident
Peter Bofinger Universität Wurzburg Disagree Very confident
John Hassler Institute for International Economic Studies (IIES), Stockholm University Disagree Confident
I general, central bank policy must return to only setting short policy rates in order not to risk its independence. This is likely to happen in many OECD countries including the U.S. as the economy recovers. The recovery and thus the return to standard monetary policy is slower in the euro-zone. However, the lack of a central decisive government in the euro-zone implies a smaller medium-run risk of less ECB independence.
Philippe Bacchetta Université de Lausanne Neither agree nor disagree Not confident
There is a risk of loss of independence, but it is difficult to know whether this loss will materialize.
Fabrizio Coricelli Paris School of Economics Strongly agree Very confident
The risks of breakdown of the Eurozone will force the ECB to be less independent. However, beyond the issue of independence, credibility of ECB policies are undermined by the past several years of erratic policy and several commitments to do "whatever it takes." Future policies driven to achieve inflation objectives are likely to have low credibility. This will imply undesirable effects of policies irrespective of the degree of independence of the ECB.
Richard Portes London Business School and CEPR Agree Not confident
Political pressures heavy in both cases, and the central banks can't ignore them. Public trust clearly down, partly because of media scapegoating. Both banks now also responsible for micropru and macropru, which expose them further to political challenge. And BoE will have to deal with new (or old) macro conflict of rising inflation and slowing growth. So it will be tough out there, but the institutional framework for both banks is pretty strong and current leadership good, so resistant in both cases. Not clear how it will play out.
Patrick Minford Cardiff Business School Disagree Not confident
The commentary described above in the background reveals wide disquiet with the behaviour of central banks in the context of the run-up to the financial crisis, its attempted resolution and its aftermath. In order, central banks allowed a sizeable credit boom to develop in the run-up; it failed to resolve the resulting contraction by providing sufficient liquidity to the banking system and the Lehman collapse resulted, triggering the acute crisis downturn; afterwards central banks coordinated around a massive regulatory backlash which prevented the recovery of credit and worsened the crisis recovery process badly. These actions have badly shaken confidence in central banks' competence. Within the euro-zone the problems are wider than the ECB, with Southern Europe still weak and with large-scale unemployment. But the ECB, as the only active prosecutor of stimulus, attracts the blame for failure. In the UK the Bank has also failed in these aspects. Its intervention in the Brexit debate was seen as politically inspired and at variance with its mandate. The QE programmes in the UK and the euro-zone are highly unpopular with savers; this has added a further element to the discontent. Nevertheless, both these institutions have now become enormously powerful bureaucracies, having accumulated responsibility for financial stability and controls (macro-pru). Governments in the EU and the UK have many other problems to cope with and are unlikely to tangle with these bureaucracies, when they would like their cooperation over economic growth. The euro-zone may of course contract in size with some countries leaving. But this will not dislodge the ECB in the smaller zone that would survive.
Gino A. Gancia CREI and Universitat Pompeu Fabra Agree Confident
Per Krusell Stockholm University Disagree Not confident
politics is very difficult to predict over the next year or so but I don't think central bank independence will decline so soon
Philippe Martin Sciences Po, Paris Disagree Confident
Alan Sutherland University of St Andrews Disagree Not confident
Francesco Lippi Università di Sassari Neither agree nor disagree Not confident
Answering the question requires to forecast political developments in these regions, not an easy task, and one for which I am not qualified professionally.
Tommaso Monacelli IGIER, Università Bocconi Disagree Confident
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
The unprecedented size of the central bank balance sheets in the Eurozone and the UK has far reaching implications for the financial dimension of central bank independence by the monetary financing of government debt undermining the credibility and independence of the central banks. The threat of fiscal dominance with monetary accommodation is particularly strong in developed countries (Eurozone and the UK) with high public debt levels (see: De Haan and Eijffinger, 2016).
Jan Eeckhout University College London Agree Not confident
Antonio Fatás INSEAD, Singapore Strongly disagree Very confident
Paolo Surico London Business School Disagree Confident
Harris Dellas University of Bern Neither agree nor disagree Not confident
Albert Marcet Institut d’Analisi Economica, CSIC Neither agree nor disagree Confident
Although there are some complaints about central banks actions they are often contradictory. Many Germans complain because the ECB is too expansionary, Trump backers complain that the Fed is not sufficiently expansionary. It is clear that central banks have reacted to the crisis in a way that it has avoided a deeper problem. Because of the crisis all institutions are in question, including central banks, but I doubt a clear constituency against their current role will emerge. But then, so many weird things have been having in politics that who knows.
Panicos Demetriades University of Leicester Agree Confident
There is certainly a serious risk to central bank independence around the world, partly because of the widened responsibilities of central banks during the crisis and also because of the rise of populist politics. In addition to the macro prudential and financial stability roles mentioned above, central banks have taken over new responsibilities in banking supervision and bank resolution. This has been the case for both BoE and the ECB. In Europe, the BRRD dictates that losses are imposed on private investors to protect the tax payer, by bailing in bondholders, shareholders and unprotected depositors. However, resolution actions by central banks that involved bail in have been fiercely attacked by politicians representing interest groups that suffered losses. Unfortunately, the independence of central banks has been eroded through political capture of central bank boards and other indirect actions by governments. If anything, central banks' widened roles require more, not less independence. If greater independence is not forthcoming, central banks should try to protect their existing levels of independence by going back to basics. Bank supervision, bank resolution and macro prudential policies can be left for other bodies, that will also need to be accountable and independent, but at least no one would be able to complain that central banks and their unelected governors have too much power.
Ugo Panizza The Graduate Institute, Geneva (HEID) Neither agree nor disagree Not confident at all
Jean Imbs Paris School of Economics Neither agree nor disagree Not confident at all
Jürgen von Hagen Universität Bonn Strongly disagree Extremely confident
Under President Draghi, the ECB's independence has proven to be very low already in past years. The ECB has consistently done what was politically convenient and, in doing so, broken European law. Its independence can hardly sink lower.
John Muellbauer Nuffield College, University of Oxford Disagree Confident
The election of Donald Trump and the dramatic shift in US fiscal policy expected in 2017 have changed the situation. ECB monetary policy had become largely ineffective (except for some periphery economies) as argued in http://voxeu.org/article/helicopter-money-and-fiscal-rules. The exchange rate channel and the US aggregate demand-spill-over channel should boost growth in Europe, though with some offset from higher commodity prices. However, inflation will rise. The steeper yield curve should help bank profitability. This removes two of the problems Eurozone monetary policy had faced. Central bank ineffectiveness in meeting its inflation target (or indeed in supporting aggregate demand) does not destroy central bank independence. After all, the ECB could (quietly) admit to the national governments that it had done what it could, given its mandate, and that it was now their turn to step up to the plate. However, the new international environment does reduce its embarrassment.
Costas Milas University of Liverpool Disagree Confident
I disagree because Central Bank independence has already declined dramatically in Europe. Why is that? For almost 4 years now (since January 2013), we have been witnessing a massive (and repeated) undershooting of ECB’s inflation target. ECB’s latest projections reveal that its inflation target won’t be “hit” even by…2019. Such spectacular target undershooting for as many as six years(!) would have definitely called for replacing the boss in any other high profile job! That said, the long-lasting target undershooting should not necessarily call into question ECB’s ability to deliver on its mandate. Rather, mainly triggered by lack of political consensus (that is, German policy-makers versus the “rest”), it calls into question ECB’s willingness to “hit” its target. This is exactly the reason why Central Bank independence is almost dead in Europe.
Kevin Hjortshøj... Oxford University No opinion Confident
Mario Forni Università di Modena Disagree Not confident

Is central bank independence still important for low and stable inflation?

Participant Answer Confidence level Comment
Wouter Den Haan London School of Economics Agree Confident
Things will be different as long as we are still in "crisis mode." These days inflation seems to be well anchored (against both upward and downward forces) and I suspect that part of this is due to having a credible independent central bank.
Akos Valentinyi University of Manchester Agree Very confident
Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
We tend to think that central bank independence means that people will believe the inflation target and act in a consistent manner. This is because the central bank has an incentive to hit the target in a way that politicians do not. It may not so much that inflation will be higher or lower, though admittedly we do think in terms of a positive inflation bias, but that there will be more uncertainty over its level if we unwind central bank role in its control.
John Driffill Birkbeck College, University of London Agree Confident
The argument will remain relevant, despite weak demand in the Euro zone and Japan. If populist governments in the US or UK get more control of monetary policy, there may be no danger of higher inflation in the short run, but it would bring risks of inflation further into the future.
Richard Dennis University of Glasgow Disagree Not confident
Mirko Wiederholt Goethe University Frankfurt Agree Confident
Lars E O Svensson Stockholm School of Economics Neither agree nor disagree Confident
Historically, external pressure on central banks has mostly been pressure to accept higher inflation than the inflation target. More recently, there has been cases of external pressure to accept lower inflation than the target, for instance in the Eurozone and in Sweden. Therefore, it seems that pressure to deviate from the inflation target may be in either direction, not necessarily always to exceed the target. In order for central bank independence to be consistent with democracy, the purpose of central bank independence must be to best achieve democratically determined objectives of monetary policy. Importantly, central bank independence should not allow central banks to deviate from those objectives, as for instance the Riksbank did when it strongly tightened monetary policy and "leaned against the wind" during 2010-2013. Therefore, central bank independence must be accompanied by sufficient central bank accountability to achieve the democratically determined objectives of monetary policy.
Ray Barrell Brunel University London Disagree Confident
In general the link between independence and inflation has been more tenuous than the academic profession suggests. Some years ago Posen suggested that independence was the result of the desire for low inflation, not the cause of it. That argument remains sound. Inflation in the short term is little influenced by central bank actions, and many of those arguing for less independence want to see less monetary expansion and higher interest rates. This would reduce inflation, not raise it. An increase in inflation as a result of a decline in independence could come from a sharp revision to inflation expectations by price and wage setters. Although financial markets may believe that independence reduces inflation, it is not clear that this view has spread to the wider economy. Marginal reductions in independence are unlikely to affect expectations, and inflation is unlikely to rise in the UK and the Euro Area as a result of any changes. However, in the US we could see legislation and pressure that would induce lower interest rates than would be normal in the face of fiscal expansion. Hence we could see a rise in inflation there well before the end f 2018 because the Fed became more politically pliable.
Stefan Gerlach BSI Bank Disagree Confident
The lessons from the high-inflation period of the 1970s have been learned and governments now know that excessive meddling in monetary policy can lead to very poor and politically costly economic outcomes. That said, they may be less clear about what constitutes "meddling", as is suggested by the UK debate about the Bank of England and Brexit.
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Confident
Sean Holly Cambridge University Agree Very confident
Sushil Wadhwani Wadhwani Asset Management Agree Confident
Sir Christopher... London School of Economics Agree Very confident
As soon as it becomes known that central bank independence is reduced financial markets will interpret it as political meddling with inflation targets and will adjust inflation expectations upward. This will be immediately reflected in lower real interest rates
Harry Huizinga CentER, Tilburg University Agree Confident
Jonathan Portes KIng's College, London Disagree Confident
The traditional frame is increasingly irrelevant. Higher inflation has not been a problem - quite the opposite - in advanced economies for most of the last decade. That doesn't mean it won't be in future but the relationship between independence/politicisation and economic outcomes will be much more complex
Michael McMahon University of Oxford Disagree Confident
I don't expect that central bank independence, or a reduction in it, will a main driver of inflation developments in the coming 48 months. Nor do I agree that some increased government involvement in central bank affairs would make impossible the implementation of a path of policy that avoids the classic inflation biases that independence helped address. The key lessons of the central bank independence literature are that monetary policy, and I believe by extension other central bank policies, should be kept free from manipulation for political gain. The expanded remit of central banks warrants greater accountability and perhaps, in some cases, it would necessitate more direct government involvement. But this does not mean that inflation flighting ability of the central bank will necessarily suffer. It is already the case that central banks do not have independence in all policy realms. For example, I believe the BoJ can be made to intervene to affect the exchange rate at the request of the government despite its monetary and legal independence.
John VanReenen London School of Economics Agree Not confident
Jonathan Temple University of Bristol Neither agree nor disagree Not confident
Mike Elsby University of Edinburgh Disagree Not confident
Andrew Mountford Royal Holloway Strongly disagree Extremely confident
The traditional argument for central banks independence has little relevance. Central bank independence only makes sense within a mindset of a stable balanced economy where the only implication of too lax a credit policy is inflation. This mindset was never grounded in reality but recent events have shown just how wide of the mark this vision of the macroeconomy is. It is not just risk and financial crises that is missing. Major banks are global enterprises that are engaged in regulatory arbitrage, in channeling billions of dollars around the world in tax avoidance schemes - (Zucman, Piketty ) - thereby significantly weakening state capacity, and in funding political campaigns in favor of reduced regulation. The idea that control of this sector should be removed from government and thus ultimately from accountability to those that the system is supposed to work for (the general public) is economically ludicrous…..and politically terrifying. The economics literature on the independence of central banks has been about eliminating political influence on central banks. However, a more relevant independence is that between the regulators and the regulated. As an economist one of the most worrying aspects of the recent financial crises has been the seemingly great desire amongst policy makers and regulators to insure ex post those who made bad investments. If the market's incentive mechanisms are to work then those who lend to people or companies or governments who have little chance of paying the money back, must lose money. To understand the ease with which an ex-post insurance policy was implemented, it is surely not coincidental that many politicians, regulators and central bankers are ex-bankers and vice versa. For credible independence, working for a regulator or as a responsible politician should preclude one from ever working in the sector that you regulate or govern. Career paths must be uni-directional (no movement from regulator to regulated) if not entirely separate.
Pietro Reichlin Università LUISS G. Carli Neither agree nor disagree Confident
The idea that reduced central banks independence leads to higher inflation is based on the assumption that fiscal authorities are tempted to use monetary finance. If this is going to be an issue for advanced economies in the next 48 months depend on many variables: how well high debt countries will be able to pursue fiscal consolidation and how they would respond to a (possible) spike in interest rates. Difficult to judge.
Simon Wren-Lewis University of Oxford Strongly agree Very confident
The critical economy is the US. If, as expected, Trump embarks on a large fiscal expansion, the Fed will want to raise rates. They will almost certainly come under political pressure not to do so, and if that pressure succeeds rates may not rise and inflation will be higher. The politics of Trump are sufficiently wild and reactionary that it is quite possible we will see the end of CBI in the US.
David Bell University of Stirling Disagree Confident
I don't expect it to be relevant because I do not expect a rapid rise in inflation, even if central-bank independence is eroded somewhat. The reason that I do not expect a significant rise in inflation over the next four years is because the output gap has been consistently and significantly underestimated in most of the world's largest economies.
Ricardo Reis London School of Economics and Columbia University Strongly agree Confident
Independent, inflation-targeting, central banks have had an extraordinary track record of success in the XXIst century at fulfilling the main part of their mandate: controlling inflation. Across the OECD, inflation has been low and stable, in spite of a myriad of shocks. Moving away from this regime can only do worse, because better would be hard. (I am only not very confident in my answer because worse may mean deflation instead of high inflation.)
David Smith Sunday Times Agree Very confident
Rising inflation is in prospect and the fear will be that central banks are more constrained in their ability to control it than in the past.
Volker Wieland Goethe University Frankfurt and IMFS Strongly agree Very confident
Yes, the ECB and other central banks will find many supporters among hard-pressed governments for argueing that low rates are still needed and overshooting inflation objectives ought to be tolerated after staying below for so long. Throw in a tumbling banking system and high share of non-performing loans, and you find even more reasons for keeping rates low and postponing any financial reckoning.
Wendy Carlin University College London Neither agree nor disagree Confident
I think the question is poorly framed. Recognition by the CB and the government that raising inflation to the target is a shared responsibility is required. It is not obvious that this undermines CB independence.
Fabio Canova BI Norwegian School of Management Agree Very confident
Cédric Tille The Graduate Institute, Geneva Neither agree nor disagree Confident
Angus Armstrong National Institute of Economic and Social Research Agree Confident
I do not see why the proposition will not continue to be true in the next four years.
Giancarlo Corsetti University of Cambridge Disagree Very confident
There are better ways to raise inflation expectations that do not require the central bank to become less independent.
Tryphon Kollintzas Athens University of Economics and Business Disagree Confident
Robert Kollmann Université Libre de Bruxelles Agree Confident
David Miles Imperial College Disagree Not confident
For the next 48 months I suspect inflation will remain relatively low - probably nearer central bank targets than over the past 48 months, and in some countries a but above it, but probably not in a region that could be called a problem area.
Michael Wickens Cardiff Business School & University of York Neither agree nor disagree Not confident
Recently this has obviously not been true even though central banks have chosen to become flexible inflation targeters. The traditional argument that governments prefer more economic growth to less will always have its effect when there is a need to reduce inflation. This is not a current problem.
Pierpaolo Benigno Università LUISS G. Carli Disagree Extremely confident
David Cobham Heriot Watt University Disagree Confident
The empirical association between CBI and inflation comes mainly from the 1960s-1980s, and, while it is easy to point to individual cases where increases in CBI have had definite effects on policy and on inflation (France 1994, UK 1997), it is hard to replicate the previous findings with post-2000 data. However, so many countries increased the independence of their central banks in the 1990s, CBI in some form is now so firmly established and economies are relatively so integrated, that it is hard to see a major or explicit reversal in CBI or a large rise in the dispersion of rates of inflation. It is therefore unlikely that we will see a range of levels of independence associated with different rates of inflation, which means that the traditional argument will not regain its relevance.
Morten Ravn University College London Neither agree nor disagree Confident
If I am right above, we won't see much change so it will be impossible to answer the question. But I believe the traditional argument about the relationship between central bank independence and inflation. There might be counter examples to this, but they are counter examples in my opinion.
Kate Barker British Coal Staff Superannuation Scheme Disagree Confident
It's hard to know how far labour market behaviour has changed, and would change again if central banks are less independent. But my view is that the changes in labour markets are not related to central bank independence.
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Disagree Confident
I think it would be a serious mistake to link the degree of indepence of central banks with the (circumstantial) fact that inflation is currently below target in many advanced economies. A more expansionary fiscal policy, supported by monetary policy, would be a more suitable way to tighten labor markets and capacity and raise inflation where it needs to.
Elias Papaioannou London Business School Agree Confident
Martin Ellison University of Oxford Disagree Confident
If anything, there is political pressure to raise interest rates more than the central banks would like to. If central bank independence falls then people like former Conservative Party leader William Hague will have more influence. He wants interest rates to rise to reward savers, but if this happens then inflation would actually turn out to be lower than it would be under a fully independent Bank of England. German Finance Minister Wolfgang Schäuble has similarly criticised the European Central Bank’s low interest rates as being damaging for people saving for retirement and he’s worried that low rates drive people towards anti-euro and anti-immigration parties. So it depends on what equilibrium we get without a credible central bank – it’s not necessarily the high inflation bias that Kydland and Prescott first warned us about.
Giuseppe Bertola Università di Torino Agree Not confident
In the current environment there can be political pressure for low inflation (e.g. from creditors) and it is not a foregone conclusion that those who prefer high inflation will win all elections
Jim Malley University of Glasgow Agree Confident
Paul De Grauwe London School of Economics Agree Confident
John Hassler Institute for International Economic Studies (IIES), Stockholm University Neither agree nor disagree Confident
The fundamental reason for central bank independence, namely that politicians have a hard time not to fall for the temptation to stimulate the economy too much, has not changed. However, in many countries, too much inflation is unlikely to be a concern within the coming 48 months. In Europe, the problem is the opposite. In the U.S., the situation is different and inflation expectations may start to rise if president Trump attempts and succeeds in pushing monetary policy in a too expansionary direction.
Philippe Bacchetta Université de Lausanne Agree Confident
Fabrizio Coricelli Paris School of Economics Disagree Very confident
The key issue for inflation dynamics in the next 48 months is not ECB independence but rather finding an effective monetary policy framework. The Great recession has shown that simple interest rate rules are not effective anchors for inflation (and inflation expectations). Acting on quantities and possibly in coordination with fiscal policy and debt management may be necessary to achieve inflation targets even if this implies de facto less independence. Nevertheless, I believe that the risks of higher inflation are generally underestimated. For the Eurozone inflationary pressures will also arise because of the continuing pressure for the depreciation of the euro.
Richard Portes London Business School and CEPR Neither agree nor disagree Confident
Political pressure on ECB would, if effective, lead to lower inflation. But for Fed, higher inflation. For BoE, if the threat is indeed stagflation, unpredictable.
Patrick Minford Cardiff Business School Agree Confident
Independence still remains important because the independent central bank is an institution which is effective in organising commitment to low inflation. The main problem is that we have seen in the 2000s ineffective action in curbing a damaging credit boom, as in my answer above. We have also seen the excessive rise in bank regulation and incompetence in managing the evolving crisis. Inevitably governments will need to be involved in redefining central bank mandates- preferably towards less distorting regulation and towards more effective control of money and credit. In other words the challenge is to replace inflation targeting with more effective monetary rules that avoid the need for so much regulatory intervention. However this is 'mandate dependence' which already exists. Instrument independence continues to be necessary to ensure commitment to rules.
Gino A. Gancia CREI and Universitat Pompeu Fabra Neither agree nor disagree Not confident
Kevin Hjortshøj... Oxford University Agree Not confident
Per Krusell Stockholm University Disagree Not confident
The difference is unlikely to be small, given that the central banks have shown limited ability to affect inflation in the current low-interest rate regime. If the economies exit this regime within the given time frame I would be more inclined to agree.
Alan Sutherland University of St Andrews Disagree Not confident
Evi Pappa European University institute Disagree Confident
Expectations about increases in fiscal policy can overturn disinflationary pressures. News about fiscal policy can actually increase demand even when the central bank maintains its independence. Previous research I have conducted using different methodologies to identify news shocks about fiscal policy, with Markus Brueckner, “News Shocks in the Data: Olympic Games and Their Macroeconomic Effects,” and with Nadav Ben Zeev “Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks”, shows exactly that! Even when we control for monetary policy, news about increases in defense spending induces significant and persistent increases in output, hours worked, inflation and the interest rate, and significant increases in investment and consumption. If one can take Trump's announcements seriously, should expect increases in inflation in the US that would be driven by news about active fiscal policy and non loss of central bank's independence.
Francesco Lippi Università di Sassari Agree Confident
When politicians take control of central banks they typically implement more expansionary policies , this i s consistent with expecting higher inflation
Sylvester Eijffinger CentER, Tilburg University Agree Extremely confident
Unconventional monetary policies have redistributive effects between the borrowers and savers (both private and public) while the arguments for central bank independence are based on the neutrality of monetary policy over the business cycle and the lack of large redistributive effects. The traditional arguments that less central bank independence leads to higher inflation assuming linearity and symmetry may be blurred by the unconventional monetary policies of central banks.
Tommaso Monacelli IGIER, Università Bocconi Disagree Confident
Jan Eeckhout University College London Strongly agree Very confident
Antonio Fatás INSEAD, Singapore Neither agree nor disagree Very confident
Paolo Surico London Business School Neither agree nor disagree Not confident
Harris Dellas University of Bern Agree Confident
Albert Marcet Institut d’Analisi Economica, CSIC Agree Confident
Panicos Demetriades University of Leicester Strongly agree Extremely confident
The traditional arguments remain valid. Less independent central banks will be short termist and try to satisfy political objectives, which emanate from electoral cycle considerations. The same applies to the wider roles acquired by central banks. If bank supervisors become less independent, they will exercises greater regulatory forbearance to 'kick the can' instead of taking early and effective intervention. Banks will become weaker and the costs of banking crises will be greater, when they finally erupt.
Ugo Panizza The Graduate Institute, Geneva (HEID) Neither agree nor disagree Not confident
The argument may still be relevant, but it will be hard to test it as we are unlikely to see both less central bank independence AND a surge of inflation above target in the next 48 months
Jean Imbs Paris School of Economics Strongly agree Confident
Jürgen von Hagen Universität Bonn Disagree Confident
John Muellbauer Nuffield College, University of Oxford Disagree Confident
Given the ECB’s limited mandate, which is unfortunately unlikely to change, I do not see much change in independence of the ECB. Assuming policy remains accommodative in the new international environment, inflation should rise towards the target. However, there are different counterfactuals, and the answer would then depend very much on the nature of the reduction in central bank independence. For example, if the ban on monetary finance of the fiscal authorities were removed, this might change the long term inflation outlook. But if an independent ECB remained the guardian of when such monetary finance were offered, I see little reason why worries about inflation should increase.
Costas Milas University of Liverpool Agree Confident
Mario Forni Università di Modena Disagree Confident

Is central bank independence (still) desirable?

Participant Answer Confidence level Comment
Wouter Den Haan London School of Economics Strongly agree Extremely confident
Just imagine another crisis. Could policy makers respond with the speed, skill and conviction that Ben Bernanke and other central bankers did?
Akos Valentinyi University of Manchester Strongly agree Extremely confident
John Driffill Birkbeck College, University of London Agree Confident
Richard Dennis University of Glasgow Agree Confident
I think that it is desirable to have central bank independence, however I don't think that small changes to the level of independence at the margin will have important consequences for economic outcomes over the coming 48 months.
Lars E O Svensson Stockholm School of Economics Strongly agree Very confident
It is definitely desirable to maintain central bank independence, provided that its purpose is to best achieve democratically determined objectives of monetary policy. But then central bank independence must be combined with strong accountability to achieve those objectives.
Ray Barrell Brunel University London Agree Confident
Central banks have changed in recent years, resuming their financial stability role. This means that they are much more involved with fiscal policy makers. The Great Moderation saw unwise innovations separating stability from the monetary authorities, and this probably worsened the crises we saw from 2007 onwards, as it reduced the speed and efficiency of reactions. Independence over interest rate setting in relation to politically set inflation targets is wise, and probably will be maintained over the next 48 months. Polities will have to reflect on the causes of crises, and these are seldom located in loose (or tight) monetary policies, but rather result from legislation changes to ‘enhance financial efficiency’ or policies to protect local financial elites from market pressure. We may see ‘efficiency’ legislation in the US, and this could raise the risk of a financial crisis there, and will impinge on Fed independence.
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Very confident
Sushil Wadhwani Wadhwani Asset Management Agree Confident
Michael McMahon University of Oxford Strongly agree Very confident
As outlined above, I believe that monetary policy and other central bank policies should be kept free of manipulation for political gain. I also believe that monetary policy independence should be maintained to avoid concerns that that government is trying to regain control of monetary policy for such manipulation.
Jonathan Temple University of Bristol Agree Confident
Mike Elsby University of Edinburgh Agree Confident
Andrew Mountford Royal Holloway Strongly disagree Extremely confident
The control of the amount of credit in the economy and the control of the banking sector more generally is intrinsically political. Central bank independence only makes sense within a mindset of a stable balanced economy where the only implication of too lax a credit policy is inflation. This mindset was never grounded in reality but recent events have shown just how wide of the mark this vision of the macroeconomy is. It is not just risk and financial crises that is missing. Major banks are global enterprises that are engaged in regulatory arbitrage, in channeling billions of dollars around the world in tax avoidance schemes - (Zucman, Piketty ) - thereby significantly weakening state capacity, and in funding political campaigns in favor of reduced regulation. The idea that control of this sector should be removed from government and thus ultimately from accountability to those that the system is supposed to work for (the general public) is economically ludicrous…..and politically terrifying. The economics literature on the independence of central banks has been about eliminating political influence on central banks. However, a more relevant independence is that between the regulators and the regulated. As an economist one of the most worrying aspects of the recent financial crises has been the seemingly great desire amongst policy makers and regulators to insure ex post those who made bad investments. If the market's incentive mechanisms are to work then those who lend to people or companies or governments who have little chance of paying the money back, must lose money. To understand the ease with which an ex-post insurance policy was implemented, it is surely not coincidental that many politicians, regulators and central bankers are ex-bankers and vice versa. For credible independence, working for a regulator or as a responsible politician should preclude one from ever working in the sector that you regulate or govern. Career paths must be uni-directional (no movement from regulator to regulated) if not entirely separate.
Pietro Reichlin Università LUISS G. Carli Disagree Confident
I don't believe that central bank independence is important in any situation, institution and political environment. Less independence of US and UK central banks have not prevented low inflation and price stability, whereas increasing the central bank independence in Italy has produced significant benefits in the nineties. Within the EMU, I think that coordination between fiscal and monetary authorities would be important, even if this may undermine some independence of the ECB.
David Bell University of Stirling Strongly agree Confident
If we extrapolate from recent events and argue that politicians will pay less attention to evidence in forming future economic policy, then having an important part of the institutional framework remaining technocratic is likely to be welfare enhancing.
Ricardo Reis London School of Economics and Columbia University Strongly agree Very confident
Among all economic policymaking institutions in most advanced countries today, central banks tend to be the better prepared, the better informed, and make the more sensible decisions. Their success at keeping inflation close to targets in the past 15 years has been extraordinary. Their responses to the financial and debt crisis were, with all their flaws and shortcomings, still much better than that of almost all other policy institutions. I am worried that there has been too much discretionary policymaking, and too quick of an embrace of financial stability as a goal that can be achieved by the central bank alone. But for now, the track record of independent central banks is very good.
Cédric Tille The Graduate Institute, Geneva Strongly agree Extremely confident
Angus Armstrong National Institute of Economic and Social Research Strongly agree Confident
I agree with the need to maintain central bank independence but over a narrow remit. This solves a clear coordiantion problem. I think it would be a retrograde step to erode this position. However, I do not think the Bank should be the only advocate of financial stability policies, our FSB contributions or expect a free ride over its position on the European debate, fiscal policy or many other issues the Bank gets involved with. These are inherently political.
Nicola Gennaioli Università Bocconi Agree Not confident
Giancarlo Corsetti University of Cambridge Strongly agree Very confident
As Willem Buiter would say (sorry Willem), relative to what?
Tryphon Kollintzas Athens University of Economics and Business Strongly agree Very confident
Robert Kollmann Université Libre de Bruxelles Agree Confident
Pierpaolo Benigno Università LUISS G. Carli Neither agree nor disagree Confident
It is however unlikely that the ECB can remain independent since in the next 48-month horizon Europe will have to deal with the Italian sovereign-debt crisis. Ecb stopping debt purchases and raising interest rates can create significant problem to the solvency of Italian government, unless access to ESM and conditionality are accepted. Independence of the monetary-policy stance can be inconsistent with the aim of preserving the integrity of the euro area.
David Cobham Heriot Watt University Agree Confident
In the modern context central bank independence should be thought of as an aspect of the coherence of macroeconomic policy rather than a simple instrument for inflation control. Central banks with significant independence are more likely to contribute to policy coherence and to oblige ministries of finance to think coherently (and not politically), so it is important to try to maintain their (incomplete) independence. But good macroeconomic policy requires the use when appropriate of fiscal as well as monetary policy, and there it is more the politicians who need to revise their understanding of how the world works.
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Agree Very confident
Central bank independence, combined with a high level of transparency and accountability, is in my view the best arrangement for advanced economies. Appointments of Governors/Presidents are still too partisan in many countries. Parliamentary hearings, possibly with the participation of external experts, and a significant multipartisan support for a candidate, would be highly welcome.in my view.
Elias Papaioannou London Business School Strongly agree Very confident
It is vital and desirable to maintain central bank independence in the coming years, as attacks to central banks from populists will continue. During the eurozone crisis, the ECB has emerged as perhaps the strongest anchor of stability in Europe. And quite often, the EU Council, mostly the Euro-group, have hided behind ECB actions. To maintain much-needed central bank independence in the euroarea, the Eurogroup and the Council have to take responsibility for their actions.
Jim Malley University of Glasgow Agree Confident
John Hassler Institute for International Economic Studies (IIES), Stockholm University Strongly agree Very confident
But it is necessary to more clearly specify the mandates of the central banks. It needs to be clarified that the broad measures with substantial fiscal components used during the great recession cannot permanently be in the hands of an independent central bank.
Philippe Bacchetta Université de Lausanne Strongly agree Extremely confident
Fabrizio Coricelli Paris School of Economics Strongly agree Extremely confident
Richard Portes London Business School and CEPR Agree Confident
Some of the old literature less relevant today. But the balance of the political economy arguments favours independence, with the necessary qualification that there must be accountability. Formally, this is weak for ECB, but Draghi and colleagues put a lot of effort into communication, and that helps, even when there is some discord.
Patrick Minford Cardiff Business School Agree Confident
See my answer to Q2.
Kevin Hjortshøj... Oxford University Agree Not confident
Costas Milas University of Liverpool Agree Confident
Per Krusell Stockholm University Strongly agree Very confident
Restricting the time frame to 48 months doesn't make a lot of sense - these choices are institutional and hence long-run in nature. From a longer-run perspective, independence still seems beneficial.
Alan Sutherland University of St Andrews Agree Confident
Evi Pappa European University institute Agree Confident
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
The main threat to central bank independence is also associated with the set of unconventional monetary policies employed during the crisis and the large redistributive effects between savers in the North and borrowers in the South of the Eurozone thereby undermining both the credibility and independence of the ECB and the structural reforms needed in the South of the Eurozone.
Francesco Lippi Università di Sassari Agree Confident
CB independence is useful because monetary policy decisions are for the medium run, an horizon for which the typical policymakers are not well equipped. The CB ex-post accountability ensures the process remains ultimately accountable to the citizens.
Tommaso Monacelli IGIER, Università Bocconi Strongly agree Extremely confident
Jan Eeckhout University College London Strongly agree Extremely confident
Antonio Fatás INSEAD, Singapore Strongly agree Extremely confident
Harris Dellas University of Bern Strongly agree Very confident
Albert Marcet Institut d’Analisi Economica, CSIC Agree Confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Agree Very confident
The Kydland-Prescott/Barro-Gordon argument remains valid.
Lucio Sarno Cass Business School Strongly agree Extremely confident
Jean Imbs Paris School of Economics Strongly agree Confident
Jürgen von Hagen Universität Bonn Strongly agree Extremely confident
John Muellbauer Nuffield College, University of Oxford Agree Very confident
I agree for reasons broadly on the grounds set out by Barro and Gordon. Given the deep problems of the Eurozone, with populist pressures for a break-up increasing, subjecting the ECB to even greater pressures from particular governments, is unlikely to lead to good outcomes. That said, better co-ordination between the most powerful government – Germany, the European Commission and the ECB to try to defuse these break-up pressures will be needed. A strong ECB voice that reflects the broader welfare of the countries in the monetary union need not detract from its independence.
Mario Forni Università di Modena Strongly agree Extremely confident