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August 2015

Macroeconomic policy coordination and central bank independence after the crisis

Biagio Bossone's picture

Breaking the ‘taboo’?

Following the seminal work by Kydland and Prescott (1977) and the vast literature that ensued, [1] central bank independence has become an established, rock solid truth in the theory and practice of monetary policy. A concrete case about the negative consequences of less-than-full central bank independence was recently discussed by Wyplosz (2015), with specific reference to the ECB. However, no discussion has taken place in a long time within academic and policy circles about cases where central bank independence might be called into question, not even after the deep reconsideration of optimal macroeconomic policy prompted by the global crisis.

In fact, the crisis has offered an important opportunity to discuss if and under what circumstances, and rules, central bank independence might be temporarily revoked or suspended, so that the central bank and government would coordinate their action for the purpose of achieving some specific priority macroeconomic objective. Regrettably, this debate has not happened thus far. In summarizing the conclusions of last April’s IMF conference on ‘Rethinking Macro Policy’, Blanchard (2015) noted that there was general consensus among participants “that central banks should retain full independence with respect to traditional monetary policy”.[2]