Is the Bank better off being independent?

In debates about central banking, it is not uncommon to hear views regarding the independence of central banks. How much control should a government have over the bank? Is the central bank accountable? Whose interests does it serve?

I would argue that a fully nationalised central bank is likely to be worse than a (nominally) independent one, since the government is likely to follow highly inflationary policies to maintain (or increase) government spending without raising taxes.

Of course, independent central banks are still subject to various government controls – for example in the UK, the Chancellor appoints the Bank Governor, and Parliament (via the Bank of England Act 1998) has set the inflation target to 2%. Even within these controls, the Bank has been able to embark on the controversial Quantitative Easing program without the need for approval from Parliament.

In the end, for me these are distinctions without a difference. Whether nationalised or “independent”, central banks have always caused inflation and created business cycles. As JP Koning has said:

Even better is to open up the clearing house business to competition and choice. That way irresponsible central bankers can be disciplined by the same forces that discipline irresponsible grocers, farmers, salesman, and the rest of us great unwashed—just cease doing business with them.

 

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