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Thursday, February 10, 2011

The Benefits of an Independent Central Bank

Ken Rogoff in an interview with Real Time Economics:

You’re probably best known in academic circles for your work demonstrating the benefits of having an independent central bank. In the wake of the Federal Reserve’s unprecedented moves to bail out the banking sector and the broader economy, though, that independence is coming under fire. Are you concerned?
Throughout the financial crisis, recession and recovery, the central bank has been used as an end run around Congress, as a tool of fiscal policy. And we should be thankful for it. The Fed was able to act when Congress and the Treasury were paralyzed. Unfortunately, there is now severe political pushback that threatens to spill over into the area of monetary policy. That would be a sad day for macroeconomic stability.
There are serious people who believe we’ve solved the inflation problem, and we don’t need central bank independence anymore. They think the stagflation of the 1970s was like teenagers experimenting with alcohol and it won’t happen again. I think that’s very wrong-headed, particularly at a time when extremely high debt levels create a temptation for governments to inflate away part of the real value of the debt.

    Posted by on Thursday, February 10, 2011 at 12:33 AM Permalink  Comments (25)


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