Central bank independence: searching for the philosophers’ stone

Abstract

Recently there has been worldwide interest in examining the scope for greater monetary policy autonomy for the central bank. At the EC-summit in Maastricht in December 1991 a Treaty on European Economic and Monetary Union (EMU) was agreed upon. According to this treaty, in the final stage of EMU — i.e. by 1997 or later — the European Central Bank is supposed to assume unlimited responsibility for monetary policy. Broadly speaking the accepted statute guarantees a central bank as independent from national and European political institutions as the Bundesbank. Furthermore, in the Pacific Basin Countries the same tendency can be discerned. Since the end of 1989 governor has strengthened the position of the Bank of Japan with respect to the Ministry of Finance, while New Zealand enacted legislation in February 1990 that increased the independence of its Reserve Bank. Finally,Czechoslovakia, Hungary and Poland have been considering proposals concerning central bank independence.¹

The authors are grateful for cooperation by Professors Alberto Alesina and Michael Parkin. They also thank Professors Hans Bosman, Onno de Beaufort Wijnholds, Mervyn King, Yves Ullmo, Nout Wellink, J.S.G. Wilson, and Wietze Eizenga, Donald Fair, Dr. Tommaso Padoa-Schioppa and Dr. Hans Tietmeyer for valuable comments on an earlier version. Eric Schaling thanks the Netherlands Organization for Scientific Research (NWO) for financial support.