A new NBER working paper by Ricardo Reis (unfortunately gated) tackles “Central Bank Design.” I’ve written a little on this myself, and gave a lecture Saturday at Mises University on “Microeconomics of Central Banking” elaborating on my ideas. I’ve been particularly critical of “independence,” the idea that central bank policies should be immune from public or legislative oversight, to avoid “politicizing” monetary policy. Governance and accountability are central to any model of organizational design, and it’s surprising — stunning, actually — that so many mainstream economists oppose any kind of oversight for the monetary authority.
I expected Reis to take the mainstream line, and he is indeed more sympathetic to the practice of central banking than I am (after all, he presumably supports the objectives, which I don’t). But his take is quite balanced and surprisingly critical, though he devotes less space to governance and oversight than I would have preferred. For example, here’s a passage from the conclusion:
While many have defended the virtues of central bank independence in general, looking at more specific questions led to a more mixed message. Even if there is a case for central banks to independently conduct the operations of monetary policy, basic democratic principles would imply that society would still choose the goals. Committing to a stable long-run nominal anchor may reduce the costs of price uncertainty, but that is not the same as having a fanatic central banker committed to 2% inflation at all times, and research shows that a flexible price-level target may be able to lower the variance of inflation and real activity. In turn, releasing the central bank from the duty to raise seignorage to make transfers to fiscal authorities does not imply that the central bank can assume large risks through bold credit policies. Moreover, even if central bankers are appointed to long terms that are independent from political pressure in order to attenuate the problem of time inconsistency, this goal will only be accomplished it the policymakers are politically accountable and transparent.
Definitely worth a read for an “insider” take on this issue.