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Central Bank Confidential

LONDON – In 1993, the economists Alberto Alesina and Larry Summers published a seminal paper that argued that central bank independence keeps inflation in check, with no adverse consequences for economic performance. Since then, countries around the world have made their central banks independent. None has reversed course, and any hint that governments might reassert political control over interest rates, as happened recently in India, are met with alarm in financial markets and outrage among economists.

In truth, however, there are many degrees of independence, and not all nominally independent central banks operate in the same way. Some monetary authorities, like the European Central Bank, set their own target. Others, like the Bank of England (BoE), have full instrument independence – control over short-term interest rates – but must meet an inflation target set by the government.

There are differences, too, in how central banks are organized to deliver their objectives. In New Zealand, the bank’s governor is the sole decision-maker. At the US Federal Reserve, decisions are made by the Federal Open Market Committee (FOMC), whose members – seven governors and five presidents of the Fed’s regional reserve banks – enjoy varying degrees of independence.

The ECB does not publish voting records and seeks consensus at the meetings of its General Council. By contrast, the BoE’s Monetary Policy Committee (MPC) has nine members, four of whom are appointed from outside the bank, and all votes are individually recorded; nobody is allowed to hide behind an institutional view. The Fed does not keep a voting record, but “dissents” from its major decisions are noted (these were almost unheard of when Alan Greenspan was Chairman, but have since become more common).