Central Bank Independence Revisited


  • An influential approach to dealing with the inflation bias was provided by Rogoff (1985) who showed that a central banker who valued inflation stability more than society as a whole could lead to improved outcomes. While he assumed the central bank was given complete independence, Lohmann (1992) showed how outcomes could be further improved if the government overrode the central bank in the face of extreme shocks. For surveys of the inflation bias problem, see Persson and Tabellini (1990), Cukierman (1992) or Walsh (2010, chapter 7). For the question of whether the Reserve Bank Act was an optimal contact, see Walsh (1995a,b), while central bank independence is discussed in Walsh (2008).

  • For recent discussions, see Cochrane (2010) and Leeper (2010).

Carl E. Walsh, Department of Economics, University of California, UCSC, 1156 High Street, Santa Cruz, CA 95064, USA. Email: walshc@ucsc.edu


The recent financial crisis has drawn attention to the interactions between monetary and fiscal policies and their potential implications for central bank independence. I focus on aspects of these interactions. First, is central bank independence meaningless with fiscal acquiescence? And does central bank independence threatens potential gains from monetary and fiscal policy coordination?