Abstract
The independence of the Federal Reserve System has once again become a major topic of debate. Over the years, critics of existing institutional arrangements have included both those who fault the Federal Reserve for being too responsive to outside pressures and those who fault it for not being responsive enough. But many observers consider the Fed to exercise more autonomy from the executive and legislative branches of the Government than is the case with central banks in most other countries, and today the criticism is heard principally from those who do not regard institutional independence as a virtue.
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Notes
For further discussion on alternative monetary constitutions, see Thomas D. Willett, ‘A New Monetary Constitution: An Evaluation of the Need and the Major Alternatives,’ Claremont Working Papers, no. 71 (Claremont, Calif.: Claremont Graduate School, November 1982), and the references cited there. See also Leland B. Yeager, ed., In Search of a Monetary Constitution (Cambridge: Harvard University Press, 1962).
An evolving branch of the economic literature investigates the interaction of national politics and macroeconomic policy. Much of this literature does not focus explicitly on monetary policy as it relates to government or partisan politics, but see Bruno S. Frey and Friedrich Schneider, ‘Central Bank Behavior: A Positive Empirical Analysis,’ Journal of Monetary Economics 7(May 1981): 291–315, and Leroy O. Laney and Thomas D. Willett, ‘Presidential Politics, Budget Deficits, and Monetary Policy in the United States, 1960–1976,’ Public Choice 40, no. 1 (1983): 53-70.
See Ira P. Kaminow, ‘Politics, Economics, and Procedures of U.S. Money Growth Dynamics,’ in Political Economy of International and Domestic Monetary Relations, ed. Raymond E. Lombra and William E. Witte (Arnes: Iowa State University Press, 1982, 181–96, along with discussions by Thomas Mayer and John T. Woolley, Comment by Thomas D. Willen and Leroy O. Laney (‘Technical Versus Political Causes of Monetary Expansion’), and the rejoinder by Kaminow.
As indicated by Lester C. Thurow, for example: ‘Whatever its historical merit, the time has come to end the independence of the Fed. If the President is competent enough to have his finger on the nuclear button, he is competent enough to control the money supply. Presidents are elected and defeated on their economic performance. They deserve both the controls and the responsibilities that this implies. No President should be able to hide his failures behind an ‘erratic’ money supply beyond his control. And if the charge is true, no President should have to put up with an incompetent Fed’ (Newsweek, 1 March 1982, 29).
Some observers have noted that under current arrangements the Administration exercises more de facto influence over the Fed than does the Congress. See, for example, Sherman J. Maisel, Managing the Dollar (New York: W. W. Norton & Company, 1973), 108–13, and Robert E. Weintraub, ‘Congressonal Supervision of Monetary Policy,’ Journal of Monetary Economics 4 (April 1978): 341-62.
According to Milton Friedman: ‘The only two alternatives that do seem to me feasible over the longer run are either to make the Federal Reserve a bureau in the Treasury under the secretary of the Treasury, or to put the Federal Reserve under direct congressional control. Either involves terminating the so-called independence of the system. But either would establish a strong incentive for the Fed to produce a stabler monetary environment than we have had’ (‘Monetary Policy: Theory and Practice,’ chapter 2 in this volume, p. 31).
For discussion, see Edward J. Kane, ‘External Pressure and the Operations of the Fed,’ in Political Economy of International and Domestic Monetary Relations, ed. Lombra and Witte, 211–32.
Comparatively few attempts have been made to classify central banks according to their independence, but the above categorization is generally supported in work done so far. See for example, Donald R. Hodgman, National Monetary Policies and International Monetary Cooperation (Boston: Little, Brown and Company, 1974); Michael Parkin and Robin Bade, ‘Central Bank Laws and Monetary Policies: A Preliminary Investigation,’ University of Western Ontario, Department of Economics, Research Report no. 7804 (London, Ontario, Canada, 1978), part of which was published in Michael Parkin, ‘In Search of a Monetary Constitution for the European Communities,’ in One Money for Europe, ed. Michele Fratianni and Theo Peeters (New York: Praeger Publishers, Praeger Special Studies, 1978), 167-95; and ‘Relations Between Government and Central Bank: A Survey of Twenty Countries,’ by D.E. Fair for the U.K. Parliament, Committee to Review the Functioning of Financial Institutions, Appendices, Cmnd. 7937 (June 1980), 557-72. A summary of the last work cited is found in Don Fair, ‘The Independence of Central Banks,’ The Banker, October 1979, 31–41 passim.
Early examples are G. L. Reuber, ‘The Objectives of Canadian Monetary Policy, 1949–61: Empirical ‘Trade-offs’ and the Reaction Function of the Authorities,’ Journal of Political Economy 72 (April 1964): 109–32, and John H. Wood, ‘A Model of Federal Reserve Behavior,’ in Monetary Process and Policy: A Symposium, ed. George Horwich (Homewood, Ill.: Richard D. Irwin, 1967), 135-66. For comparative international evidence, see also Robert J. Gordon, ‘World Inflation and Monetary Accommodation in Eight Countries,’ Brookings Papers on Economic Activity, 1977, no. 2:409-68, and T. D. Willett and L. O. Laney, ‘Monetarism, Budget Deficits, and Wage Push Inflation: The Cases of Italy and the U.K.,’ Banca Nazionale del Lavoro Quarterly Review 31 (December 1978): 315-31.
Parkin, ‘In Search of a Monetary Constitution for the European Communities,’ 180–84.
The conclusion for the United States, however, was influenced by at least two aspects of Parkin’s analysis that should be noted. First, as his indicator of secular inflationary-deflationary stance, Parkin uses the average rate of change in the exchange rate for the currency of each country in his sample against the U.S. dollar over the 1951–75 period. He finds that the two most institutionally independent central banks — in Germany and Switzerland — rank one and two, respectively, and the United States ranks number nine (that is, eight currencies appreciated against the dollar, while only three — those of France, Italy, and the United Kingdom — depreciated). But use of exchange rate changes as a measure of inflationary trends is questionable, because exchange rates are often influenced substantially by real factors that can cause large deviations from purchasing power parity, both in the short run and the long run. (For discussion and references, see the articles by Richard J. Sweeney and Thomas D. Willett in The International Monetary System: A Time of Turbulence, ed. Jacob S. Dreyer, Gottfried Haberler, and Thomas D. Willett [Washington, D.C.: American Enterprise Institute for Public Policy Research, 1982].) Also, while simple comparisons may be misleading, Parkin observes that 100 percent of the Fed’s Board of Governors is Government-appointed (compared with fractions in the German and Swiss cases), but he does not account at all for the fact that only a fraction of the policymaking Federal Open Market Committee is composed of that Board.
For supporting evidence, see Leroy O. Laney and Thomas D. Willett, ‘The International Liquidity Explosion and Worldwide Inflation: The Evidence from Sterilization Coefficient Estimates,’ Journal of International Money and Finance 1 (August 1982): 141–52.
For one analysis, see Alan T. Peacock and Martin Ricketts, ‘The Growth of the Public Sector and Inflation,’ in The Political Economy of Inflation, ed. Fred Hirsch and John H. Goldthorpe (Cambridge: Harvard University Press, 1978), 117–36.
See Robert E. McCormick, ‘Why Are Inflation Rates Different Across Countries?’ (Paper prepared for the Liberty Fund Conference, Long Island, New York, 25–27 September 1980).
For investigation, see M. Panic, ‘The Origin of Increasing Inflationary Tendencies in Contemporary Society,’ in The Political Economy of Inflation, ed. Hirsch and Goldthorpe, 137–60.
For discussion, see Richard J. Sweeney and Thomas D. Willett, ‘The International Transmission of Inflation,’ Kredit und Kapital 9, special supplement (1976): 441–517.
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© 1986 Martinus Nijhoff Publishers, Dordrecht
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Banaian, K., Laney, L.O., Willett, T.D. (1986). Central Bank Independence: A\n International Comparison. In: Toma, E.F., Toma, M. (eds) Central Bankers, Bureaucratic Incentives, and Monetary Policy. Financial and Monetary Policy Studies, vol 13. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-4432-9_11
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