Letter to the Editor published in The Economist, 12 November 2016
The issue of central-bank independence is a complex and difficult one (“Hands off”, October 29th). Monetary policy has significant social and political effects and as such should be subject to some form of political accountability. The artificial institutional separation between fiscal and monetary policy is unhealthy. In Britain it allowed George Osborne to pursue a policy of fiscal austerity through the Treasury while leaving the Bank of England to do all the heavy lifting in monetary policy. The same has happened in the euro zone.
The vast majority of central banks across the world do not have operational independence. Neither did most of the European central banks until the launch of the euro. In the Netherlands, for example, the final decision on monetary policy rested with the minister of finance.
It is essential that the question of what “central-bank independence” means in practice is the subject of public debate. In the current difficult political atmosphere, how does one balance the judgments made by technocrats with the political accountability that is essential if we are not to continue eroding people’s confidence in democracies? As John Kay stated in his foreword to our recent report, “No democracy can accept that policy decisions which have large effects on the distribution of income and wealth, on financial stability and economic growth, are off limits.”