Central banks—are their reputations and independence under threat from overburdening?

• Date: 01 March 2017
• Published date: 01 March 2017
• DOI: http://doi.org/10.1111/infi.12102
• Author: Otmar Issing

DOI 10.1111/infi.12102

COMMENTARY

Central banks—are their reputations and

independence under threat from overburdening?

Otmar Issing

1,2

1

President of the Center for Financial Studies, Goethe University Frankfurt, House of Finance, Frankfurt am Main,

Germany

2

Former Chief Economist and Member of the Executive Board of the European Central Bank (ECB)

Correspondence

Otmar Issing, Center for Financial Studies, Goethe University Frankfurt, House of Finance, 60629 Frankfurt am Main,

Germany.

Email: issing@ifk-cfs.de

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INSTITUTIONAL OVERBURDENING

Over decades, if not centuries, the reputation of central banks has gone through ups and downs. The

Great Moderation saw their reputation at its peak. Most central banks were given the status of

independence from political influence. This paper explains how elevated expectations and

overburdening with ever more responsibilities could undermine the prestige of central banks and

foster attacks on independence. The European Central Bank (ECB) is analysed as a special case.

The Great Moderation marked a period in which inflation came down from rather high levels.

Growth and employment were at least satisfying and variability of output substantially declined. Was

this ‘goldilocks economy’just the result of luck, due to a decline in exogenous shocks (Stock &

Watson, 2003), or of improved macro policies, especially monetary policy (Romer & Romer, 2002)?

The jury is still out. But this period considerably increased the reputation of central banks and bankers.

It was almost unavoidable that, as a consequence, expectations regarding the ability of central banks to

control the economy reached an unprecedented and unsustainable peak. This prestige was further

enhanced during the financial crisis, when central banks saved the world from repeating the Great

Depression of the 1930s.

The latest Annual Report of the Ban k for International Settlem ents (BIS, 2016) presents a

concise assessment:

[T]he extraordinary burden placed on central banking since the crisis is generating

growing strains. During the Great Moderation, markets and the public at large came to

see central banks as all-powerful. Post-crisis, they have come to expect the central bank

to manage the economy, restore full employment, ensure strong growth, preserve price

stability, and foolproof the financial system. But in fact, this is a tall order on which the

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© 2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/infi International Finance. 2017;20:92–99.