Central bank independence revisited. Is it still a free lunch?

Plus, the RBA Reforms bill; and the US February CPI

The 1980s and 1990s saw the development of indices of central bank independence and other institutional characteristics, such as transparency and accountability. One of the earliest measures was that of Bade and Parkin, which went through various iterations from 1980 and opened up the whole field of central bank institutional design and its relationship to macroeconomic performance. As a recent IMF paper notes, ‘Bade and Parkin scored central banks least independent if the government was the final policy authority, government officials served on the bank’s board of directors, and the government appointed all of the members of the policy setting body.’ The RBA ticked all those boxes, in part thanks to section 11 of the RBA Act, and consequently did not score particularly highly.

An early finding from this literature was a correlation between high levels of central bank independence and low inflation. Alesina and Summers (1993) showed that the gains in inflation performance associated with higher central bank independence did not come at the expense of real economic performance. While this finding was consistent with the long-run neutrality of money, it was also taken to be a ‘free lunch’ that gave new impetus to efforts to make monetary policy more independent of government during the 1990s.