Stanley Fischer on Central Bank Independence

Stanley Fischer is a rare economist who has the double condition of being a top academic economist (and co-author of my first textbook on macroeconomics) and having had very substantial experience in his field of expertise as a policy-maker in two countries. He was the governor of the Centrral Bank in Israel between 2005 and 2013, and he is currently the Vice-President of the US Federal Reserve. In his last published speech, he provides an excellent synthesis of the literature and practice of Central Bank independence. He explains very well how in a democracy strategic delegation into an independent authority must be accompanied by mechanisms of accountability. He explains how this is achieved in different ways in different countries, and in the particular case of the US, how many of the reforms that have taken place in the last 10 to 20 years have been about increasing transparency and accountability. These reforms have facilitated a positive contribution of the independent Federal Reserve in the last crisis (although he says nothing about the likely contribution of the institution to the previous financial bubble). One should be careful when it comes to making proposals to radically change the current mechanisms, because they have evolved by trial and error amidst enormous difficulties. In his speech, Fischer analyzes how this last financial and economic crisis has expanded the number of tasks of Central Banks. This challenges the old prescription of Jan Tinbergen of a tight correspondence between the number of objectives and the number of instruments. It also makes it more difficult to introduce powerful incentives for central bankers. In this context, he establishes an interesting distinction between Central Bank Independence and Monetary Policy Independence. For example, he argues that different functions in the same Central Bank can have different degrees of independence, typically more independence for monetary policy and probably less independence in the case of financial stability and supervision. But he admits that much more work and experience is needed to understand the implications of this multiplicity of tasks.