Skip to main content

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions

Bank of England Stefan Rousseau/PA/Getty Images

Central Banks in the Dock

Today, central banks are under attack for missing their inflation targets, failing to maintain financial stability or restore it in transparent ways, and ignoring the global repercussions of their policies. But compromising central bank independence in order to enhance political accountability would be to throw the baby out with the bathwater.

LONDON – On November 11, 1997, the Bank of England took a big step toward independence, courtesy of the second reading in the House of Commons of a bill amending the Bank Act of 1946. The bill gave legislative affirmation to the decision, taken by then-Chancellor of the Exchequer Gordon Brown, to free central bank operations from governmental control. This was a landmark event for an institution that had been under the yoke of government for a half-century. It symbolized how the need for central bank independence had become conventional wisdom.

Now, however, this wisdom is being questioned, and not just in the United Kingdom. So long as inflation was the real and present danger, it made sense to delegate monetary policy to conservative central bankers insulated from pressure to finance government budget deficits. Today, in contrast, the problem is the opposite, namely the inability of central banks to raise inflation to target levels.

To achieve this, it is necessary for monetary and fiscal policymakers to work together, including by allowing the central bank, in extremis, to monetize budget deficits. But when it comes to cooperating with the fiscal authorities, central bank independence is a hindrance, not a help.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/Dq4cicm;

Handpicked to read next

  1. leonard52_Frank Augstein - WPA PoolGetty Images_borisjohnsonthumbsup Frank Augstein/WPA/Pool/Getty Images

    The End of the EU’s Brexit Bounce

    Mark Leonard

    After years of watching the United Kingdom muddle through a political crisis while enjoying an unprecedented level of unity among themselves, Europeans now must prepare for darker days. Negotiations over the future UK-EU relationship will inevitably divide Europeans and offer fodder to Euroskeptics.

    1

Edit Newsletter Preferences