Central bank independence is the denim jeans of economic ideas – not fresh but still about as fashionable as economic policy gets. For a quarter of a century, more or less everyone has agreed that central banks should be operationally independent of government.
Independent central bankers are better placed than politicians to set the interest rates the economy needs. The latter face the “time inconsistency” problem: they want to cut rates to make us happy today – before an election, for example – even though it will damage the economy tomorrow.
But that isn’t the only benefit of central bank independence – an often neglected one is that they also tell us the truth. Regular independent forecasts encourage government to be realistic about what the future might bring. But more than that, central banks have, well, banks of economists examining crucial issues. And increasingly their work gets published.
On this side of the Atlantic, the Bank of England deserves credit for establishing Bank Underground as “a blog for staff to share views that challenge – or support – prevailing policy orthodoxies”. Meanwhile, in Washington last week, Fed economists published an early, but unwelcome, Christmas present for Donald Trump.
Examining his tariff-hiking, trade-war-inducing approach to international relations, their research shows the claim that it protects manufacturing jobs is… fake news. Far from creating jobs, it has reduced them. Yes, domestic manufacturers get some protection within the US market, but that is more than offset by the fact that they face higher costs for components they import and lose export markets when others (such as China and the EU) retaliate. The lesson? Trade wars bad, independent central banks good.
• Torsten Bell is chief executive of the Resolution Foundation
