Can the ECB be Truly Independent? Should It Be?
This paper traces the link between the importance of adjusting the mix of policies correctly, and the need to resolve the accountability vs. independence debate which has grown up with the institutional changes in fiscal policy and the new Central Bank in Europe. We find that unfettered competition between independent policy makers with different preferences over the targets of economic policy, make it unlikely that policy makers will either be able to set the right policy mix (for their own targets, or for those of the economy as a whole); or to adjust it properly around the cycle. Such conflicts lead one policy to undermine the effectiveness of the other, in which case no one’s targets are met. On the other hand, limiting either fiscal or monetary policy in order to get a more effective mix, is no more than a partial remedy. Independently negotiated coordination agreements (or performance contracts) between fiscal and monetary policy makers are a more appropriate solution.
KeywordsInterest Rate Monetary Policy Central Bank Fiscal Policy Real Exchange Rate
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