Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence

Abstract

Independence 1. Introduction Even before the much-cited restructuring of the Reserve Bank of New Zealand in 1990, central banks had been granted varying degrees of independence from short-term political control. The discussion underlying the current fad for central bank independence has assumed that these earlier choices about monetary regimes were made at random, either by interpreting the negative correlation between average inflation rates and indices of central bank independence as prima facie evidence of a causal relationship, or by recommending central bank independence to any and all governments, be they in Paris, Moscow, or Karachi. This paper argues that such an assumption of the exogeneity of monetary institutions is false. National differences in the degree of central bank independence in the postwar period resulted instead from differences in financial sector opposition to inflation. Everything in economics can be construed at some level as endoge-This paper was prepared for the

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