Comments on: Fed Independence and Comparative Institutional Analysis

By: Jesper Wittrup

Jesper Wittrup — Sat, 14 Nov 2009 18:57:12 +0000

And the fact that economists – and people in general – hold central bankers in such high regard is also the most persuasive argument for central bank independence. Given the wide-spread belief in the professionalism and prudence of central bankers, rational governments should aim at increasing their credibility by creating and maintaining independent central banks. Recent events may have weakened this logic, though: http://www.voxeu.org/index.php?q=node/3943

By: Peter Klein

Peter Klein — Sat, 14 Nov 2009 15:02:52 +0000

Jesper, you’re quite right, my last sentence is misleading. As you say, the puzzle is why economists readily accept that legislators, regulators in energy and manufacturing, and local officials can be captured, but think that Fed chairmen, governors, Treasury secretaries, and most jurists are immune.

By: Jesper Wittrup

Jesper Wittrup — Sat, 14 Nov 2009 07:44:44 +0000

Good point! But I am baffled by the outgoing question”: Guys, have you never heard of public-choice theory?” It appears to me that much of the literature on central bank independence indeed explicitly claims to be based upon public choice theory. Apparently it is possible, however, to be well versed in public choice theory and observe with distaste the rent-seeking behavior of the political world, and at the same time believe that independent central bankers can only act based upon professional norms and in the public interest.

This peculiar bias is not something new, though. Notice for instance how Buchanan, one of the founders of the public choice school, seems to perceive the independent judge as a proud defender of a Status Quo interpretation of the “Rules of the game”, and portrays him as a neutral umpire who is clearly “above” the foul world of politics (see e.g. his 1988 American Economic Review Article on constitutional political economy).

In contrast to Peter Klein I tend to believe that in the end a good case might be made for the relative independence of both central bankers and judges, but Peter clearly has a point: How can it be that Public Choice theory is (with a few exceptions) so blind to the possible incentives these “political” actors may have?