The Paradox of Monetary Credibility

Abstract

One of the hallmarks of recent political events has been a growing suspicion of so-called elites and experts—chief among them, those very central bankers who were only recently being celebrated for saving the global economy. Central bank independence and rule-based monetary policy became the norm over recent decades on the assumption that democratic influence would erode the policies’ credibility and therefore effectiveness. Yet, recent electoral events remind us that insulating economic decision-makers too much from popular concerns tends to erode their legitimacy—and thus undermines the credibility they seek to protect. Whereas central banks provided some of the most effective responses to the last crisis, it is unlikely they will have the legitimacy and effectiveness needed to fight the next crisis. In fact, their declining legitimacy may be one of its major causes.