Central Bank Independence: a Historical Perspective

The paper offers an overview of the literature to clarify the origin and content of the theoretical positions that have influenced the 1990’s central banks’ reforms and the state of the debate on the contradiction that is nowadays manifest in the dominant literature between central bank’s independence and democracy. It is argued that the approach that has become dominant after the 1970s is based on assumptions on the working of the economic system, which eliminate the problems of effective demand that had been the main preoccupation of theory and policy to then. It is also argued that up to the 1970s the economic literature accepted that the analysis of central bank’s independence was mainly the subject of those disciplines, which examine the organisation of the State and the relations among its institutions. The paper moves from the standpoint that the dominant positions in the economic literature do not only depend on the degree of analytical elaboration of the theories, but also on the consensus achieved by certain views over a specific historical period. Thus, the 1929 Great Depression enhanced Keynesian ideas, making them dominant for some decades. Some events of the 1970s shifted the consensus towards economic liberalism. The paper also recalls some criticisms raised against the mainstream literature, focussing on its belief that the economic system is permanently in a position equivalent to full employment and on its conclusion that to improve the efficacy of monetary interventions it is necessary to violate some rules of democracy. It describes the recent contributions, which use different representations of the relations State-society and show that there is no contradiction between central bank’s independence and democracy in the actual organisation of monetary policy.