The Unassuming Economist

From a paper by Sylvester C. W. Eijffinger, and Jakob de Haan:

“Thirty years ago, when we wrote our Princeton essay about the political economy of central bank independence, the theoretical and empirical arguments for independent central banks seemed to be obvious (Eijffinger and de Haan, 1996). Nowadays it seems that these arguments are questioned by many politicians.
According to Rogoff (2019), “central bank independence is rarely granted by constitutional decree, and even where it is, the letter of the law has little meaning if political support is lacking”. As Rogoff notes, if monetary policy is politicized, once inflation rises, it will be very difficult to bring it under control and to protect monetary policy from further political interference. Some recent examples of central banks where independence and credibility have been severely compromised and where inflation and interest rates have drifted away from healthy levels should serve as a useful reminder, e.g. Argentina, Türkiye, Venezuela, and Zimbabwe. Other authors support this view and relate it to the limited mandate for the central bank in the past. Wachtel and Blejer (2020) asked whether statutory independence implied a limited mandate for the central bank, given the requirement in democratic societies that independent central bankers be held accountable for their activities, meaning that the results of their actions should be easily comparable with those mandated. The authors asked whether this limited mandate, in turn, led central bankers to ignore financial stability concerns. Reasoning along similar lines, Tucker (2018) asked whether central banks’ involvement in the conduct of macro-prudential policies rendered their independence problematic. Indeed, central banks may be confronted with the trade-off between their monetary policy and macro-prudential responsibilities in the long run.
Legal independence is a necessary but not sufficient requirement for actual central bank independence. Forder (2022) emphasizes that practice may differ from the letter of the law, that is, politicians may be able to exert pressure on central bankers: “It is the structure of incentives and constraints that determines the effect of any rule, not the legislators’ intent in drafting it” (p. 552). However, giving up legal independence is not the proper way forward. As Issing (2013, p. 282) put it: “If the central bank’s independent status is exposed to strong political opposition, giving up independence de facto might be seen as an option to preserve de jure independence. However, this would come at the expense of undermining the fundament of independence for the central bank”.”