Central Bank Independence: An Economists’ Idea That Shaped the World?. Ryszard Kokoszczyński. Outline. Origins of the idea Nice (though implausible) theoretical model Academic solutions Development of theoretical concepts Search for empirical support
Central Bank Independence: An Economists’ Idea That Shaped the World?
With central banks outside the Euro Areanow actively engaged in credit easing through the direct acquisition of private securities (commercial paper, corporate bonds, mortgages and ABS) and possibly in the future through unsecured lending to the private sector, the exposure of central banks to credit risk is becoming larger and could become huge in some countries before this crisis is over. Central banks could therefore be faced, if theysuffer a large capital loss, either to engage in aggressive base money creation to maintain solvency, endangering their inflation targets and price stability mandates, or to go to the nearest Treasury with a begging bowl, thus undermining the central bank’s independence (Willem Buiter, LSE).
To protect that independence, the central bank’s lending policies should avoid straying into the realm of allocating credit across firms or sectors of the economy, which I believe is appropriately the purview of the market. If government must intervene in allocating credit, the fiscal authority should do so rather than the central bank. (Charles Plosser, President, Philadelphia Fed)
Economic theory can influence reality
(though sometimes not in line with economists’ intentions)