Central Bankers and the Issue of Independence

Abstract

In democratic systems of government, a hierarchical system of control governs the activities of bureaucratic agencies, including central banks. At the top of the central bank hierarchy are the taxpayers, who assume the role of the principal. Because of the high costs of direct participatory democracy, taxpayers elect (either directly or indirectly) a smaller body of individuals to represent their interests in governmental decision making. Taxpayers grant to this elected legislative body a wide range of powers including the right to decide how the officials at the central bank will be selected. It is the legislature’s task to oversee the central bank’s operations to insure that it conducts monetary policy to serve the interests of taxpayers.