Central Banks around the world are being threatened by a confluence of populism, nationalism and economic forces that are making monetary policy political again. They are fighting to stay ‘independent’.
Social scientists recognize the term, ‘independent’ only to how policy is implemented, that is, free of political pressure, and that independence does not give the central bank the ability to set its own goals. Central bank independence means that monetary policy is delegated to unelected officials and the government’s influence on monetary policy is restricted.
According to Willem Buiter, American-British-Dutch economist, central bank independence is under threat which comes from the wider political and social climate. And political scientists attribute this to the rise of populism and of anti-establishment, anti-expert and anti-technocratic sentiment as well as from development specific to central banks.
Buiter said that since the start of the Global Crisis in mid-2007, central banks in most advanced economies have become more powerful and political. Reports highlight President Donald Trump has demanded that interest rates should be slashed, speculated about firing the boss of the Federal Reserve and said he will nominate Stephen Moore and Herman Cain, two unqualified cronies to its board.
Brexiteers rubbish the competence and motives of the Bank of England, while in Turkey, President Recep Tayyip Erdogan has been in a tug-of-war with the central bank. And India’s government has replaced a capable central-bank chief with a pliant insider who has cut rates ahead of elections. This, for all, shows a genuine need for reflection on central bank’s objectives and tools.
Legal measures of central bank independence may not reflect the true relationship between the central bank and the government, especially in countries where the rule of law is less strongly embedded in the political culture. There can be wide gaps between the formal, legal institutional arrangements and their practical impact; very much likely in developing countries. The turnover rate (TOR) may therefore be a better proxy for central bank independence than measures based on central bank laws. The TOR is based on the presumption that, at least above some threshold, a higher turnover of central bank governors indicates a lower level of independence. Buiter said the altered role of modern central banks is evident in the large set of new unconventional monetary policy measures employed during the last decade.