Independent or lonely? Central banking in crisis

Abstract

The financial crisis has called our understanding of central bank independence (CBI) into question. Central banks were praised for bold interventions but simultaneously criticized for overreaching their mandates. Central bankers themselves have complained that they are ‘the only game in town’. We develop the second generation theory of CBI to understand how independence can turn into loneliness when a financial crisis calls for cooperation between fiscal authorities and the central bank. Central banks are protected from interference when there are multiple political veto-players, but the latter can also block cooperation. Furthermore, central banks in multi-veto-player systems operate under legal constraints on their financial stabilization actions. They can circumvent these constraints, but this invites criticism and retribution. More surprisingly, central banks have strategically invoked their constraints to gain cooperation from political authorities.

Keywords:

• Central bank independence
• delegation
• financial crisis
• monetary policy
• veto-players
• strategic agents

Acknowledgements

The authors thank Hans-Helmut Kotz (Harvard), Ellen Meade (Federal Reserve), Paul Tucker (Harvard), Geoffrey Underhill (University of Amsterdam), and Cornelia Woll (Sciences Po) for helpful comments, along with participants in a seminar in the Department of Politics at Birkbeck and panels at Council of European Studies conferences in Paris and Philadelphia.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The text of the Act, including dated amendments, is available on the Fed’s website at https://www.federalreserve.gov/aboutthefed/fract.htm.

2 The text can be found at https://www.ecb.europa.eu/ecb/legal/pdf/c_32620121026en_protocol_4.pdf, and amendments are listed on the covering page (https://www.ecb.europa.eu/ecb/legal/1341/1343/html/index.en.html).

3 We are grateful to Ricardo Davico from the IMF Statistics Department who sent us an update of the original blog (URL: http://www.imf.org/external/pubs/ft/fandd/2012/12/dataspot.htm) with additional information. The ECB has revised its data since the blog was published but this did not change the gist of the time series.

Additional information

Notes on contributors

Deborah Mabbett

Deborah Mabbett is Professor of Public Policy in the Department of Politics at Birkbeck, University of London. She has published widely on delegation and policy-making by nonmajoritarian institutions in journals including RIPE, Regulation and Governance, West European Politics and Politics and Society.

Waltraud Schelkle

Waltraud Schelkle is Associate Professor of Political Economy at the European Institute of the London School of Economics and Political Science. Her latest book, The Political Economy of Monetary Solidarity. Understanding the Euro Experiment, was published by Oxford University Press in 2017.