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The Constitutional Position of an Independent Central Bank

Published online by Cambridge University Press:  28 March 2014

C. A. E. Goodhart
C. A. E. Goodhart*
Affiliation:
London School of Economics and Political Science
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Extract

In 1989 The Reserve Bank Of New Zealand Act Gave The Rbnz the operational independence to vary monetary instruments, in particular to control the level of short-term money market rates, in such a way as to hold inf lation within a stated range over a stated period of time. That numerical range and period were to be agreed in a contractual arrangement between the Minister of Finance and the Governor, and the Governor was to be held personally responsible for achieving those agreed objectives.

Type
Original Articles
Information
Government and Opposition , Volume 37 , Issue 2 , April 2002 , pp. 190 - 210
Copyright
Copyright © Government and Opposition Ltd 2002

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References

1 The main exceptions have been in those cases where the central bank has, as its objective, a rigid peg to the currency of another country, e.g. through a currency board, as in the cases of Argentina, Bulgaria, Estonia and Hong Kong, or has even adopted the currency of another country, e.g. Ecuador and Panama; and see Mahadeva, L. and Sterne, G. (eds), Monetary Policy Frameworks in a Global Context, London, Routledge, 2000, especially ch. 3, pp. 29–56.Google Scholar

2 Fischer, S., in Capie, F., Goodhart, C., Fischer, S. and Schnadt, N., The Future of Central Banking, Cambridge, Cambridge University Press, 1994, ch. 2, pp. 292–3.Google Scholar

3 Hetzel, R. and Leach, R., ‘The Treasury-Fed Accord: A New Narrative Account’, Federal Reserve Bank of Richmond Quarterly Review, 87:1 (Winter 2001), pp. 33–55 Google Scholar; Hetzel, R. and Leach, R., ‘After the Accord: Reminiscences on the Birth of the Modern Fed’, Federal Reserve Bank of Richmond Quarterly Review, 87:1 (Winter 2001), pp. 57–64.Google Scholar

4 Lawson, N., The View from No 11, London, Bantam Press, 1992, ch. 69, pp. 867–3.Google Scholar

5 Roll, E. (Chairman), Independent and Accountable: A New Mandate for the Bank of England, London, Centre for Economic Policy Research, 1993 Google Scholar, otherwise known as the Roll Report.

6 See for example Bernanke, B., Laubach, T., Mishkin, F. and Posen, A., Inflation Targeting: Lessons from the International Experience, Princeton, N.J., Princeton University Press, 1999.Google Scholar

7 For example F. Capie et al., op. cit.; Goodhart, C., The Central Bank and the Financial System, London, Macmillan, 1995, especially ch. 4.CrossRefGoogle Scholar

8 For an academic study of the various political and economic factors influencing the politicians to take this step, see M. King, Distributional Politics and Central Bank Independence: Monetary Reform in the United Kingdom, Canada, Australia and New Zealand, PhD thesis submitted to the University of London, September, 2001, and the literature cited there.

9 With the ‘natural’ rate of unemployment primarily determined by supply-side, not demand-side, factors.

10 This position does remain contentious, especially for those who argue that a rise in unemployment in the short run may well have longer-term effects on employment and output (‘hysteresis’ in our jargon) and for those who dismiss the whole ‘natural rate’ approach. It is not my purpose here to enter this debate. Suffice it to say that a vertical longer-term Phillips curve is mainstream consensus.

11 We ignore here the 1970s/1980s debate about whether monetary policy was better managed by setting interest rates or the growth rate of (some chosen) monetary aggregate. Events led to the first of these viewpoints becoming almost universally accepted; and the above analysis can be viewed, without loss of substance, solely in terms of interest rate management.

12 Some Ministers have had more faith in their own judgement than in that of the Bank. Ken Clarke was an example. Another counter-argument was that the various arms of macro-policy, i.e. fiscal and trade policies, as well as monetary policy needed to be set in a coordinated centralized fashion. This was an argument much used by the Treasury in the UK. Again it would take me too far afield to describe why the force of this argument seems to have subsided somewhat in recent years.

13 R. Lastra and G. Miller, ‘Central Bank Independence in Ordinary and Extraordinary Times’, inj. Kleineman (éd.), Central Bank Independence: The Economie Foundations, the Constitutional Implications and Democratie Accountability, Stockholm Studies in Law, Stockholm, Kluwer Law International, 2000, ch. 3, pp. 31–50,

14 Menger, K., ‘On the Origin of Money’ (translated from German by C. Foley), Economic Journal, 2 (1892), pp. 238–55Google Scholar; also see Brunner, K., ‘The Uses of Money: Money in the Theory of an Exchange Economy’, American Economic Review, 61:5 (1971), pp. 784–805 Google Scholar; and Kiyotaki, N. and Wright, R., ‘On Money as a Medium of Exchange’, Journal of Political Economy, 97:4, pp. 927–54;CrossRefGoogle Scholar Kiyotaki, N. and Wright, R., ‘A Search-Theoretic Approach to Monetary Economics’, American Economic Review, 83:1 (1993), pp. 63–77.Google Scholar

15 Mélitz, J., Primitive and Modern Money: An Interdisciplinary Approach, Reading, Mass., Addison-Wesley, 1974, see especially pp. 127–30.Google Scholar

16 P. Grierson, ‘The Origins of Money’, Creighton Lecture, Cambridge, 1970, reprinted and revised in pamphlet form, London, Athlone Press, University of London, 1977, pp. 19–21. (For detailed references see the original.)

17 Also see Exodus 21:32 and 35 and Deuteronomy 22:13–19, 28–9. Kleiman describes such compensations: Kleiman, E., ‘“Just Price” in Talmudic Literature’, History of Political Economy, 19:1 (1987), pp. 23–45.CrossRefGoogle Scholar

18 Professor Kleiman, in personal correspondence with me, argues however that this line of argument: ‘does not tally with the evidence of the ancient Near East, which seems to have been much more marketized (and later on also more monetized) than mediaeval Europe. Here markets certainly pre-dated coinage and even settled population: in fact, it was probably nomads who both had to resort to market exchange for the goods they did not produce and served as the carrier of interregional exchange. The Biblical story of Joseph’s sale to the Midianites (Genesis 37:25, 28) provides a vivid illustration.

Silver constituted the medium of exchange in the ancient Near East, so far so that it became synonymous with money — as, indeed, it still is in modern Hebrew. Admittedly, the units were not coins but weights — etymologically, “Sheqel” is derived from weighing. But the weight unit enjoyed general acceptance: Abraham purchased the cave of Machpelah in Hebron [you are still reading of the consequences in the daily press …] for “four hundred sheqels of silver, current money with the merchants” (“sheqels of silver acceptable by merchants” is a more literal translation — e.k.) (Genesis 23: 16). The repeated reference to a “sacral sheqel”, rendered into English as “sheqel of the sanctuary” (e.g., Leviticus 27:25), provides some clue to the standard weight’s origin. Temples were the great economic centers of the ancient world. They provided an opportunity to trade, especially at the festivals marking the end of the agricultural season; and having amassed considerable wealth from the gifts of their cult’s devotees, they very often became lenders and bankers on a great scale, hence their need of a monetary standard, which probably anteceded that of the State.’

19 Wray, R., ‘The Neo-Chartalist Approach to Money’, in Nell, E. and Bell, S. (eds), The State, The Market and the Euro, Cheltenham, Glos., Edward Elgar, 2002, ch. 5Google Scholar. The references in the text are to: Hicks, J., A Theory of Economie History, Oxford, Clarendon Press, 1969 Google Scholar; Innes, A., Martyrdom in our Times: Two Essays on Prisons and Punishment, London, Williams & Norgate Ltd, 1932 Google Scholar; Maddox, T., The History and Antiquities of the Exchequer of the Kings of England, in Two Periods, vols I and II, 1769, second edn, New York, Greenwood Press, 1969.Google Scholar

20 Also see E. Maskin andj. Tirole, ‘The Politician and the Judge: Accountability in Government’, draft paper, Toulouse, IDEI and GREMAQ, April 2001.

21 Ibid.

22 As will be observed from the above, the collective power of those with a vested interest in more inflation is generally greater than those preferring deflation.

23 One of the differences amongst independent central banks lies in their view of whether the responsibility of the individual member of an MPC should be to the collective decision of the group as a whole, or whether the member should be individually responsible, so that his/her personal vote is recorded and he/she is encouraged to justify their individual positions, see A. Blinder, C. Goodhart, P. Hildebrand, D. Lipton and C. Wyplosz, How Do Central Bank Talk?, London, ICMB and CEPR, 2001. Similar differences in approach also occur in the judiciary.

24 On this, see the articles by Svensson, e.g. Svensson, L., ‘Inflation Targeting as a Monetary Policy Rule’, Journal of Monetary Economics, 43:3 (1999), pp. 607–54;CrossRefGoogle Scholar Svensson, L., ‘Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets’, European Economic Review, 41:6 (1997), pp. 1111–46.CrossRefGoogle Scholar

25 See A. Blinder et al., How Do Central Banks Talk”?, op. cit.; L. Mahadeva and G. Sterne, Monetary Policy Frameworks, op. cit.

26 Glasner, D., Free Banking and Monetary Reform, Cambridge, Cambridge University Press, 1989 CrossRefGoogle Scholar, see especially pp. 36–8; R. Lastra and G. Miller, ‘Central Bank Independence’, op. cit.

27 Coleman, W., ‘Is it Possible that an Independent Central Bank is Impossible?: The Case of the Australian Notes Issue Board, 1920–1924’, Journal of Money, Credit and Banking, 33:3 (2001), pp. 729–48.CrossRefGoogle Scholar

28 Debelle, G. and Fischer, S., ‘How Independent Should a Central Bank Be?’ in Goals, Guidelines, and Constraints Facing Monetary Policymakers, Conference Series, No. 38, Federal Reserve Bank of Boston, 1994.Google Scholar

29 See M. King, ‘Distributional Politics and Central Bank Independence’, op. cit.

30 Bank of England, The Transmission Mechanism of Monetary Policy, www.bankofengland.co.uk. 1999.Google Scholar

31 Goodhart, C., ‘Can Central Banking Survive the IT Revolution?’, International Finance, 3:2 (2000), pp. 189–210.Google Scholar