Full Record

New Search | Similar Records

Title The dominant discourse of central bank independence
Publication Date
Date Accessioned
University/Publisher Australian National University
Abstract The period from 1960 to 2000 saw a major evolution in monetary policy and institutions. This dissertation makes the claim that there is a better explanation of these events than the typical narrative, or dominant discourse. The typical narrative is that a relationship between inflation and unemployment (the Phillips Curve) was proposed around 1960. One interpretation of the relationship was that increasing aggregate demand would reduce unemployment with some acceptable inflation. Milton Friedman then stated in 1968 that, in the long run, this practice would entrench inflationary expectations and there would be no useful employment benefits. This was accepted by the economics profession, especially by the mid-1970s, around the time of the first oil shock. This period also saw the rise of stagflation and the countries that managed the inflationary outbreak best were those where independent central banks were able to withstand politicians’ short term instincts. Economists attributed this to a commitment concept; if governments could override their central bank only at the cost of legislation or constitutional change, then monetary policy would focus more on long term expectations, rather than the political short term. Empirical work in the 1990s established this relationship and many countries made their central banks more independent during this decade. A better view acknowledges some features of this narrative. For example, Milton Friedman’s theory of expectations was very influential. (Chapter 2). But there is reduced evidence for the rest of this narrative. For example, the Federal Reserve did tighten monetary policy after 1982 compared with the period before 1979, but this appears to have been through placing less emphasis on output instead of being more inflation averse. Further, policymakers in the late 1960s and 1970s underestimated the level of unemployment at which inflation started increasing. (Chapter 3). Politicians were generally involved in disinflations, but their role and visibility decreased as legal inflation and central bank independence (CBI) increased. This suggests that, in practice, legal independence bestows the disinflation role on the central bank (Chapter 4). The role of politicians, however, is not fully clear because the proportion of elections where a voter backlash against inflation occurred was small. Therefore, the political dynamic against inflation may have occurred through elites, rather than popular opinion (Chapter 5). Finally, there was not a strong correlation between CBI in developed countries because the literature made errors of omitted variable bias and not examining whether CBI was endogenous. Inflation in the 1970s and 1980s was more clearly related to economic factors…
Subjects/Keywords central banks; inflation; political leadership; technical decision making; delegation; Great Inflation; Phillips curve; economic literature; Federal Reserve System; United Kingdom; United States; Germany; OECD; economic vote
Language en
Country of Publication au
Record ID handle:1885/143483
Repository anu
Date Retrieved
Date Indexed 2019-12-30
Issued Date 2017-01-01 00:00:00

Sample Search Hits | Sample Images

…politically, leaders such as Reagan and Kohl contributed to central banks’ success by giving them policy space in which to work. Politicians can combine leadership and delegation. This chapter outlines the thesis and discusses the literature, both for and…

…expectations meant that deciding policy at each point in time leads to sub-optimal policy. The problem is that there is no link from future policy decisions back to the current decisions of agents. A decision-making rule is preferable because it leads to…

…Prescott (1977), the government cannot use the later compensation decision to influence agents not to build on the flood plain. The government might announce that it will not compensate people in future, but people’s actions will depend on whether…

…there are no inflation surprises and unemployment is at the NAIRU. Policy makers are not bound by decision rules and therefore have an incentive to implement inflation surprises, leading to expectations of inflation, which leads to actual inflation. Its…

…with the inclusion of other variables, such as Brumm (2000) and Franzese (1999). Other papers proposed refinements to CBI theory. For example, Keefer and Stasavage (2003) concluded that delegation to increase CBI has a…

…government converted these debts to paper money by law. This decision, combined with other legislative changes, survived Supreme Court challenge and with little effect on financial markets. In the court cases, much turned on the fact that bondholders were…