How Awesome is Central Bank Independence?

Ryan Avent constructs a central bank paradox:

There is simply no avoiding the conclusion that unemployment is a much, much bigger problem than inflation right now, and yet the Fed is unwilling to do anything more about unemployment, seemingly because it is concerned about inflation. What we want is some inflation! Rising prices would mean that the Fed is doing all it can do, counter-cyclically speaking.

An independent central bank is crucial. Political control of monetary policy must inevitably lead to accelerating inflation and long-run economic instability. But at the moment, the American economy could use an increase in expected inflation. And a real threat to Fed independence would almost certainly deliver it, either because markets would anticipate increased political influence on monetary policy ever after, or because the Fed would seek to fend off pressure from Congress by easing further, which amounts to the same thing. But we don’t actually want there to be a real threat to Fed independence, because that way uncontrolled inflation lies.

I’m not ready to abandon central bank independence, which I think has worked well for the United States, but I don’t think we should be dogmatic about it either. The case for central bank independence is that it’s worked well. But if it turns out that an unanticipated negative consequence of central bank independence is systematic deflationary bias in major economy, unduly slow economic growth, and unduly high unemployment then that means it turns out to not work very well. And certainly if you look at the behavior of the Fed, the European Central Bank, and the Bank of Japan that seems to be the situation we’re in. The best thing would be for existing monetary authorities to start doing more to fight unemployment. Then our institutions work and everything’s good. But if our institutions don’t work, then we can’t just cling to them forever—we’d have to start thinking about whether there isn’t some other kind of arrangement that could improve on the current situation.

After all, as John Quiggin has pointed out a big part of the case for central bank independence was that it was supposed to help us avoid exactly the sort of crisis we’re in. Of course, to be worth sticking with our current institutions don’t need to be perfect, they just need to be better than the available alternatives and I don’t have another alternative in mind at the moment. But still, this seems worth thinking about.