Working Paper No. 148 | November 1995

Does an Independent Central Bank Violate Democracy?

The question of central bank independence is one of degree. A completely independent central bank is impossible as long as a country has provisions for altering central bank powers, even if that requires constitutional amendments. On the other hand, any central bank has at least some discretion in monetary policy unless it is either in the pocket of a dictator or required by mandate to follow a mechanical rule, such as the central bank in Argentina where monetary policy is effectively determined by the currency board.

In the United States and many other countries, people question the degree of central bank independence, often citing the need to better insulate central bankers from pressure to serve either the political motives of government officials or the financial interests of private individuals and organizations. This school of thought argues that the central bank should be left alone to pursue one monetary policy goal: price stability. It is feared that either government officials with too much influence over central bankers or laws setting inappropriate priorities for them undermine this independence. The Federal Reserve already enjoys a good measure

Associated Program:
Roger Waldinger Joel Perlmann

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