The Central Bank

Abstract

The idea of central bank autonomy is taken for granted as a feature of the modern economy. The creation of autonomous central banks appears as the most prominent example of institutions insulated from the direct influence of elected officials and political cycles. Independent central banks thus provide a satisfactory protection from politicians’ temptation to manipulate monetary policies in order to obtain short-term gains (i.e. votes), disregarding the long-term cost that this decision might have (i.e. inflation). Politicians decided to give up control of monetary policy to provide more politically neutral policy solutions that are not easy to accomplish in the context of partisan politics.