The principle that a central bank should set monetary policy free of direct political control, on the theory that elected officials face short-term incentives to inflate the economy for electoral gain, undermining the credibility of price-stability commitments. The idea drew heavily on New Institutional Economics work on credible commitment and time-inconsistency, and shaped the design of the Bundesbank, the Federal Reserve's statutory insulation, and the European Central Bank's founding treaty.
Facts
FieldMonetary Economics, Institutional Economics 1 Proposed ByFinn Kydland and Edward Prescott 2 SignificanceCentral bank independence matters because insulating monetary policy decisions from short term political pressure is credited with making a central bank's commitment to price stability more credible and effective. 2 Connections
Associated With
Source The New Palgrave Dictionary of Economics
Source The New Palgrave Dictionary of Economics
Critiqued Here
Why this is disputed. As a constituent agency of China's State Council rather than a statutorily insulated body, the PBOC is a standing reference case in the comparative literature on central bank independence, cited on both sides of the debate over whether formal independence is necessary for monetary credibility.
Source A Brief History of the People's Bank of China
Associated With School
Formalized through New Institutional Economics work on credible commitment and the time-inconsistency problem in monetary policy.
Source The New Palgrave Dictionary of Economics
Sources
1. The New Palgrave Dictionary of Economics
Palgrave Macmillan- central bank independence
- Associated With School: New Institutional Economics
- Associated With: Federal Reserve System
- Associated With: European Central Bank
2. Wikipedia
Wikimedia FoundationTime inconsistency, history
The first paper on this subject was published by Finn E. Kydland and Edward C. Prescott in the Journal of Political Economy in 1977, which eventually led to their winning the Nobel Memorial Prize in Economic Sciences in 2004.
Wikipedia, Central bank independence, lead section
Independent central banks have more credible and effective commitments to price stability.
View the Source A Brief History of the People's Bank of China
People's Bank of ChinaAssociated With: People's Bank of China
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