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eBook details

• Title: Independent Central Banks: New and Old.
• Author : The Cato Journal
• Release Date : January 22, 2006
• Genre: Politics & Current Events,Books,
• Pages : * pages
• Size : 239 KB

Description

In the 1990s, several governments gave their central banks operational independence to pursue low inflation, and steps were taken to make the new monetary policy more credible by making it more transparent (Bernanke et al. 1999). The governor of the Reserve Bank of New Zealand is subject to dismissal if inflation is outside the assigned range. In the United Kingdom, if inflation misses the target by more than 1 percentage point, the governor must explain publicly why the divergence occurred and what steps the Bank of England is taking to deal with it. The new transparency "facilitates public understanding of monetary policy and increases the incentives for the central bank to pursue the announced goals of monetary policy" (Svensson 1999: 631-32). Accountability is increased, indeed made possible, by the choice of a unique objective, which implies "a stronger commitment to a systematic and rational optimizing monetary policy than other monetary policy regimes" (p. 608). These institutional changes are consistent with the literature on time inconsistency that shows the impossibility of employment-promoting monetary policy under rational expectations (Kydland and Prescott 1977, Fischer 1977). But they are not without precedents. The Bank of England Act of 1998 was like the Bank Charter Act of 1833 in its antecedents, design, and purposes. The latter also increased the Bank of England's independence, and provided the transparency and accountability needed to make the step credible. Furthermore, it also came on the heels of developments that had rendered the Bank less useful to governments--namely, the end of war finance, which served the same purpose as the end of belief in the Phillips Curve.

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