On Central Bank Independence

Author:Paul Tucker
Position:Chair of the Systemic Risk Council and a research fellow at Harvard University's John F. Kennedy School of Government. This article draws on his 2018 book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, published by Princeton University Press.

The author of Unelected Power discusses constitutionalist central banking in a world of inert politics.

LET’S BRIEFLY TAKE A STEP back to the world of
2018–19. Politicians were attacking centra l bank
monetary policy and bank supervision across
the world: from the United States, via Italy
and Turkey, to India. Powerful private sector
actors wanted central ban ks to buy equities from
them whenever the next recession arr ived. And
technocrats themselves were embracing think
tank cal ls to steer the supply of credit to tackle
climate change, i nequality, productivity growth,
and other pressing social problems, even wh ile
some were hauled up for intervening in politics
and so departing f rom their mission.
Around the world, the political lef t was calling for
“People’s Quantitative Ea sing”; libertaria ns sought
salvation in privately issued cr yptocurrencies; and
the conspiratorialist fr inge persisted in seeing mone-
tary ocia ls as in league with enemies of the people.
Whether you cheer or choke on that, it was
obvious, even before COVID-19, that some-
thing was going on in t he once-sober world of
central bank ing. Being the only ga me in town
was turning out to be a politica l, even consti-
tutional, nightmare.
And then came COVID -19, returning central
banking to t he kind of role it played when, from
the 1930s to the 1980s, it was merely an instru-
ment for nance ministries . In some jurisdictions
(notably the United States and the euro area),
the central bank h as in eect been standing
in for governments that cannot act decisive-
ly or promptly, risking becoming the de facto
scal authority. In others (perhaps the United
Kingdom), the central bank w ill nance execu-
tive government, possibly without a framework
that ensures an ex it route, and riskin g releasing
executive government from the constraints of
the elected assembly.
Two models of central banking
ose latest developments remind us that t wo quite
dierent models of central ban king prevailed i n
the past. One sees a countr y’s central bank as t he
operational arm of government nancia l policy,
its functions determined by tech nocratic compar-
ative advantage. is model i s rooted in central
banks being t he pivot of the payment system, as
Francis Baring obser ved toward the end of the 18th
century. As the bank ing community’s team captain,
they provide, in economic terms, club goods.
Under the other model, central banks a re inde-
pendent authorities delegated specic responsibilities
and formally insu lated from day-to-day politics.
ey provide public goods (such as price stability)
and preserve common goods (such as n ancial
stability) that can b e enjoyed by all but eroded
by the exploitative.
ose modes of existence are so distinct that
passage from one to the other is often f raught. In
emerging market economies, even a fter formal
independence, central banks are sometimes
expected (and occasional ly want) to continue
to provide a very wide range of serv ices to their
society. In advanced economies, the tra nsition
from subordinate agent to independent trustee
has typica lly raised questions about boundaries,
sometimes at the cost of welfare.
For example, as the Bank of Eng land sought
during the late 1980s and early 1990s to make
On Central Bank Independence
The author of Unelected Power discusses constitutionalist
central banking in a world of inert politics
Paul Tucker

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