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Central bank independence in historical and contemporary perspective: A critical account of an old new narrative.

Sener Ulas, University of Potsdam

The belief that central banks should be independent from elected governments is one of the most accepted dogmas in economic theory. This idea can be traced back to the classical political economy. Well known economic intellectuals like David Ricardo, Walther Baghot and Lord Overstone were convinced that regulation of money should be independent of government. Since then the protagonists of this institutional strategy declare an autonomous central bank, which observes a rule based and depoliticized monetary policy, as the sine qua non for economic stability. Despite the wide consensus on the issue, skepticism remains and heretic voices continue to question the conventional wisdom on central bank independency and depoliticized monetary policy. A new (old) controversy on the relation of politics and monetary policy raised in the aftermath of the monetary policy interventions of the leading central banks after the global financial and economic crisis. This paper will provide a critical overview of the recent controversy on independent central banks. It will question the conceptual and theoretical arguments for independent central banks in historical and contemporary perspective. It will do so by, considering the explanations in the classical political economy literature and linking these arguments to the recent political economic controversy on monetary policy. I will argue from a critical perspective, that the theoretical foundations and conceptual roots of central bank independency remain controversial and its political economic narrative is shaky. A careful read of the historical literature will help in fine-tuning while debating about the contemporary and future role of monetary policy and its institutions.

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Keywords: Central Bank Independency, History of monetary theory, monetary policy

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