Corbynistas need reminding what central bank independence is and why it’s good

These points will be old hat to economics cognoscenti, but they need repeating because of how the debate about ‘Corbynomics’ has been conducted.

I’ll single out Richard Murphy, Corbybn’s economics advisor, as an example, citing points he made in his discussion of the proposed ‘People’s Quantitative Easing’ [PQE] with myself and others.

But the views addressed here have surfaced many times in recent months, so RM is not the only rhetorical offender.

One is that ‘central bank independence is an illusion’.   Being so, PQE or any other policy that seems to intrude on central bank independence is not a problem, because there is nothing lost by dispelling an illusion. In fact, the ‘illusion’ analogy suggests, PQE or similar may allow us to see things how they really are.

It’s certainly true to say that, in functioning democracies what central banks do follows from choices made by electorates, or at least by politicians on electorates’ behalf. In the UK, for example, the electorate chose a Labour Government in 1997, and on its behalf it delegated to the Bank of England the task of wielding monetary policy instruments, but in pursuit of a goal it would determine. [Lately finessed to express this as stabilising a combination of inflation and real activity].

So what the BoE actually does with interest rates and asset purchases from month to month traces back to decisions voters made in May 1997.

That being the case, Mr Murphy’s arguments imply, there’s no problem voters choosing Jez’ manifesto, and, along with it, instructions for the Bank of England to buy bonds issued by a new Government infrastructure investment vehicle.

However, there IS a problem, deriving from the fact that, despite this ultimate democratic control over the monetary authorities, there IS a form of central bank independence, which we might more revealingly call ‘curtailment of government control over monetary policy’ and put there not by accident, but purposefully, to solve a pre-existing problem.

The curtailments of government control are twofold. First, the BoE has control over the instruments on a month to month basis.   This gives confidence that the government won’t say one thing [‘price stability!’] and do the other [‘cheap mortgages!’] with the instrument. This is known in the trade as the BoE having ‘instrument independence’].   Second, by passing the BoE Acts, in which the broad terms of the BoE’s goals are set out, the government restricted its day to day freedom to change the goals of monetary policy.   For sure, new Acts could be passed, and the goals re-written. But this would cost the government, in reputation, Parliamentary time and even political favour.

The Acts themselves contain clauses allowing for the government to take back control over monetary policy instruments in times of national crisis. But if these were used lightly, the benefits flowing from passing the Acts in the first place would evaporate.   So, despite the existence of those clauses, the Government’s month to month control over monetary policy goals and instruments is curtailed.

This begs the question what those benefits are. Having established that central bank independence [read curtailment of government control over monetary policy on a month to month basis] is not ‘an illusion’, we still have to remind ourselves why such curtailment is a good thing.  A second line of attack adopted by Richard Murphy in some of his media encounters, inconsistent with the first ‘central bank independence doesn’t exist’ strategy, is the line of attack that central banks should simply do what governments want them to (sounds reasonable, put like that, doesn’t it) and if they don’t like it they can go and take a running jump.

The reason curtailment of government month to month control is a good thing is that politicians themselves proved that they could not be trusted to set good monetary policy themselves.

Governments have horizons limited by the electoral cycle, and, in a tight race for re-election, will be unable to resist pressing the economic accelerator to create a boom that they can then take credit for. Only later, after the election, putting on the brakes again.   Subjecting the economy to damaging ‘political business cycles’. A related problem with government control is the issue of time-consistency. When it starts out, the government promises low inflation, hoping to be rewarded with muted wage settlements and low bond yields. However, once the advantages of that promises are pocketed, the temptation to renege and generate higher inflation is irresistible, because it will boost employment [by eroding real wages] and lower the real value of government debt.

The way out of this was for the government to make it more costly for itself to change the inflation rate from period to period. Which is just what the complicated legislative infrastructure of monetary policy does.

In a Twitter exchange, responding to my ranting about how PQE erodes central bank independence [why it does this I explained in previous posts], Richard Murphy said ‘you hate democracy, don’t you’. Hopefully if you read this far you can see what my answer to this is: Of course not. But governments acting on behalf of electorates in democracies face time-consistency problems. And have to devise solutions to them to make their electorates better off [in this case by generating low and stable inflation]. The particular solution discussed here [central bank independence] was itself chosen by the electorate, pretty much. Or at least, plenty of time has elapsed for the electorate to have a pop at overturning it.

So defending central bank independence is not anti-democracy. On the contrary, it’s campaigning for a democratically chosen institution. And one that makes the economy in a democracy function better. Perhaps, ultimately, allowing the institution of voting to endure. If you think that sounds overblown, think of the examples of Weimar and Zimbabwe, and wonder if better designed and more resilient institutions might have made the outcomes there more favourable.

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34 Responses to Corbynistas need reminding what central bank independence is and why it’s good

  1. I agree: Richard Murphy isn’t all that clued up.

  2. Luis Enrique says:

    I thought Murphy was more recently saying that the decision to turn on People’s QE would be taken by independent BoE, when it thinks stimulous required, making the above moot. Am I wrong, and he’s actually saying BoE would be relegated to implementing a decision made by the Chancellor, whenever the government wishes to finance some spending?

    This is *the* most important question about People’s QE, and most of what I have read on it, including Chris Giles and other smart types, is frustratingly vague about it. This is what makes the difference between a crazy idea we ought to run a mile from, and a potentially useful device for boosting public investment during a downturn by giving the BoE a new instrument to play with.

    Does anybody have a link to a definitive answer about what Corbyn/Murphy envisage?

    • Tony Yates says:

      More recently yes, initially, no.
      But he has said the things I allude to. Namely, that central bank independence is ‘an illusion’. And also that independent central banks should just do what governments tell them to do. Betraying a lack of understanding about what independence means and is for.
      I also subscribe to the slippery slope argument as explained in previous posts, so the defence that it’s just for crisis times is weak. Why even mention it now, when the recovery has been underway for 2 years?
      And, recalling another point from previous posts, it does not make sense – and hence is not credible – to present a menu of acyclical government spending projects to be financed by a cyclical policy tool.

      • Luis Enrique says:

        “to present a menu of acyclical government spending projects to be financed by a cyclical policy tool”

        Yes, talk of using it to finance acyclical spending is only consistent with the daft use money financing regularly variant of the idea. However, I don’t see the inconsistency with using a cyclical instrument to give a cyclical kick to govt spending.

        Remember, the background reality is that despite economists telling them not to, and even the odd central banker diplomatically suggesting that less stupid fiscal policy may make life easier, the fact is that governments let public investment fall during the recession. All analysis explaining how this QE idea is unnecessary in theory needs to add politics into the theory. I think you should consider this QE idea as a trick to get around that. it might help to get around whatever political constraints or failings that mean politicians cut investment when they are trying to cut a fiscal deficit. A bit like earmarking taxes. Daft in theory, sometimes useful in practice. I know this isn’t going to convince you, but I hope it might start you mulling over the possibility in a new light.

  3. iGlinavos says:

    I am suspicious of Corbynomics, but it is undeniable that financial markets have a significant impact on the way in which society is organized, since the allocation of credit is the sine qua non of distributional politics. Consequently, when the decision to cede operational autonomy to central bankers is justified in terms of the need for market sensitive policies, it is equally clear that a particular way of organizing society is being simultaneously constructed and defended against possible redefinition. As a result, the social basis of financial trading has changed markedly in recent years in a way which is selective of a social structure of accumulation grounded in the monetary orthodoxy that central bank independence was designed to deliver.

    Corbyn could therefore be right in seeking to expose the politics that lie beneath the Bank’s ‘façade of independence’.

    • Tony Yates says:

      Financial markets are a fact of life. CBindependence makes life better for all of us by allowing cheaper government finance and low inflation [nb low inflation hits the poorest, who tend not to be indexed, hardest]. There are no interesting politics to ‘expose’ that are hidden and need changing.

      • iGlinavos says:

        Thank you for your response. I do not mean politics in a ‘conspiracy of interests’ kind of way. I was trying to argue that there are distributional biases embedded in the theory of independence. It is the people who lose out (that Corbyn seeks to represent) that will see therefore independence as a problem. Please see here for a full explanation

      • Tony Yates says:

        I think central bank independence of the UK sort, relative to its absence, is highly progressive, since eliminating the political business cycle and taming inflation benefits the poor much more than the rich. Since it’s they who bore the costs of unemployment in recessions, and also the poor tend to be much less indexed. There are some kinds of independence that are not benign, but that’s not relevant to the Corbyn-prompted-debate.

  4. am says:

    Glad you keep hammering away at the point of BOE independence under their remit. The phrase “political business cycles” deserves a Nobel and we can do well without such things.

  5. Lyn Eynon says:

    There are several points here that I wish to respond to and I shall do so in a series of comments. But I first want to comment on the tone of the debate.

    Please drop the term ‘Corbymaniacs’. Those of us who are synpathetic to what Jeremy Corbyn has to say on the economy are not lunatics. We are trying to find solutions to the serious problems of recent years, such as the decline in wages and living standards, continuing high unemployment and precarious or exploitative work, low productivity, inadequate investment in infrastructure and skills, etc., and we are not convinced that the policies offered by either the government or the other Labour leadership candidates address these adequately.

    Corbyn has refused to descend into personal abuse in his campaign and by focusing on policy is trying to raise the level of political debate and standards in this country. Whatever you think of his policies, try to follow his example in this.

  6. oldcobbler says:

    If you consider the OECD countries since 1960, is economic performance under independent Central Banks (measured by , say, growth of per capita GDP) any better than under other arrangements ? And couldn’t the arguments for Central Bank independence be extended to many other areas of government activity, such as foreign policy ?

    • Tony Yates says:

      So many thinks affect GDP per head that I would be sceptical of such a finding even if it exists [I don’t know that it does]. But certainly inflation is a lot lower and less variable; and, even with the crisis, real growth rates are more stable. These are beneficial in themselves, at least if you assume that people don’t like uncertainty.

  7. Lyn Eynon says:

    Central bank independence is not a simple yes/no question. It is a question of degree, objectives, rules and politics.

    You quote Weimar Germany and Zimbabwe as examples of how central bank subservience can go badly wrong (and you could have chosen many others) but you should also recognise that an excess of independence can go astray, as the ECB has shown, responding slowly and indaequately to the deep Eurozone crisis and deliberately subverting the elected government of Greece through its ELA decisions, all outside any effective democratic accountability.

    Indeed, the record of central banks in the years of independence is far from outstanding. Yes, retail price inflation has been brought under control but we have also seen asset price bubbles and the most serious financial crisis for seventy years. So it’s legitimate to ask if the existing framework is the best we could achieve.

    That need not mean removing month-to-month control over selected monetary instruments from the BoE. There is merit in the objective/implementation separation. But I want more explicit political debate over the goals the BoE is set, and more accountability for its decisions, which should be subject to greater scrutiny by Parliament. If the outcomes of those decisions are seen as undesirable, then the BoE’s objectives and powers should be reviewed without compromising operational independence.

    As you note, objectives have been finessed to acknowledge real activity as well as inflation (and if we compare the BoE – or the Fed – to the BCE we can be grateful for that) but it would have been better for that to have been democratically discussed and adopted rather than behind closed doors. One of the unfortunate consequences of sanctifying independence is that it inhibits such debate, as it does today on the appropriate inflation target.

    We also need to recognise that the choice of instuments by the BoE has consequences beyond those on inflation or activity. Decisions on interests or QE also have distributional impacts which are a legitimate matter of public concern.

    So for me the challenge is not to remove operational independence from the BoE but to acknowledge the risk that its decisions inevitably impact on matters that are properly subject to political debate. Hence the monetary framework and objectives should be continually reviewed and periodically adjusted to ensure that the outcomes of those decisions align with the wishes of the electorate.

    • Tony Yates says:

      There’s lots there I agree with.
      For example, your comment that the degree of curtailment of EZ government control over monetary policy tools is greater, and, arguably, too great. I for one would prefer that the ECB had not been allowed to issue its own interpretations [which evolved over time] of its price stability mandate.

      I think everyone recognises that monetary policy has distributional consequences; but the dominant such consequence is that if it is not performed energetically in support of stabilising the business cycle, the poor lose out far more than the rich, since it is they who disproportionately bear the cost of unemployment in a recession.

  8. Lyn Eynon says:

    Would an instruction to the BoE to buy bonds from a government investment vehicle compromise its operational independence? You assume it would but that depends on the magnitude of such purchases relative to the BoE’s balance sheet and the other monetary policy powers it possesses.

    The size of the balance sheet is relevant because monetary policy operates at the margin. As long as the BoE possesses sufficient assets, it could offset any undesirable money supply impacts of buying investment bonds through open market operations. With its current swollen balance sheet there is considerable scope for selling back to the market assets bought through QE, so making room for the new investment bonds. This would change the composition rather than the size of its balance sheet.

    Alternatively, it could tighten macro-prudential controls over money creation by commercial banks. In either case, the BoE could – within wide limits – preserve its operational independence in what matters, even though constrained to purchase government investment bonds.

    I accept this would have some costs. Interest rates would rise, reducing the value of financial assets and constraining private expenditure, although multiplier effects from increased public investment would offset this. The balance between the public and private sectors would shift in favour of the former but at present there are many opportunities for beneficial public investment.

    You might disagree but it is a legitimate matter for political debate.

    • Tony Yates says:

      I don’t dispute that any of these things should not be debated. I am irked simply by the lack of expertise betrayed by Corbyn and those whose ideas he draws on.

      I don’t think the government should be issuing any instructions about what bonds the BoE should be buying. Except in the sense that, for the BoE to take balance sheet risks at all [for which HMT would ultimately be responsible] it needs to have permission.

      • Lyn Eynon says:

        I agree Corbyn will need to draw on more expertise to work through his anti-austerity position into a set of specific and credible proposals. If he becomes leader this must be a priority but should be done in any case. Personally I welcome detailed critiques such as yours as they will force us to work this through.

        I think a case can be made for limited, controlled direct purchase of government investment bonds by the BoE, in certain circumstances. I would not support this being unrestricted.

        It is worth noting that such purchases do not seem to be central to Corbyn’s position. ‘People’s QE’ is mentioned as an option in his economic policy statement but much more emphasis is placed on raising money through taxation, especially through tackling avoidance and evasion. It gets no mention in yesterday’s 10 point summary. A national investment bank is given prominence but he does not specify how this should be funded, although tax justice is again stressed.

      • Tony Yates says:

        If investment is needed, it can and should be financed by conventional tax and bond finance, the exact mix depending on the costs of borrowing at the time. There’s no need to create a separate ‘investment bond’. And the BoE can and would buy such bonds [as it does now] if it happened that interest rates were at the zero bound and no other means of stimulus was available. I’m glad that this idea is not central. Hopefully, at some point, it will move off the radar altogether! Incidentally, Corbyn’s position on eliminating tax evasion is all very well, but almost every emerging political platform in recent history desiring to spend has promised to find money from that source, so I don’t regard that as anything different from eg classic Tory rhetoric.

      • Tony Yates says:

        PS, you talk of ‘us’ – are you involved in an official capacity?

  9. Donald says:


    This is written as though they would just print money, rather than give the decision to the BoE. In fact, I assumed that was the case until I read the comments.

    You also seem to be taking the worse interpretation of what he’s saying on other things, eg the illusion of independence which could mean a lot of things. Coupled with the clarification that people’s QE would be delegated to the BVoE it seems pretty clear he doesn’t mean that there’s no point in separating BoE functions from government in some way.

    A fair, objective post would at least highlight the lack of clarity and say why you’re interpreting things as you do. Otherwise all you can really say is that the guy’s language is pretty ambiguous.

    All in all, it seems to me a bit like one of the establishment rallying round.

    • Tony Yates says:

      1. The qualification that this would only be in the time of crisis was added later. Not mentioned in the early drafts of the idea.
      2. Notwithstanding that Murphy did indeed assert that central bank independence was an illusion; and later that central bankers should simply do what they were told by governments. This warranted the explanation of just why independence is a good thing.
      3. As I said in an earlier post, it is not credible to ‘delegate’ financing an ongoing, acyclical liability with a supposedly cyclical, and perhaps never invoked policy tool.
      4. The fact that this reform is proposed despite the availability of conventional fiscal finance says it all, really.
      4. Ah, if only I could be part of that establishment. I’ve personally got no interest in ‘rallying round’. My only interest is in making sure that bad macroeconomic policy ideas do not gain currency.

      • Donald says:

        1. But before this post, no?
        2. I’m not disputing what he said, just saying it’s open to interpretation AND given the clarification you’re interpretation seems uncharitable
        3./4. Largely agree.
        5. Apologies that was a bit of a cheap shot.

      • Tony Yates says:

        1. Yes, but so what, this post is about RM’s subsequent and inconsistent remarks about cbi, i) that it’s an illusion and ii) if it isn’t, we should eliminate it [central banks should do what they are told; TY ‘hates democracy’].

        I don’t think his language on cbi is ambiguous. Although I do think he doesn’t really understand what he’s talking about, and has not read about what cbi actually is taken to mean, nor why it’s there. That is why I am being uncharitable; it’s pretty gob-smacking to see someone who is not an economist, and has not bothered to avail themselves of what the subject has to offer here, weighing in, and being taken seriously by a contender for leader for a major party. This would be like Yvette Cooper reading a blog post I decided to write on foreign policy, and basing her pitch around it. Completely absurd. [Because I am no more than an interested amateur on foreign policy].

  10. Jeffry House says:

    We in Canada used to hear this stuff all the time. Wikipedia article on Monetary Reform:
    “Alternatively, some monetary reformers such as those in the Social Credit movement, support the issuance of repayable interest-free credit from a government-owned central bank to fund infrastructure and sustainable social projects.”

  11. Ghaliban says:

    Central bank independence is an illusion in the sense that a central bank has to work within the mandate set by the government, and this mandate can be changed relatively easily (e.g from price stability to investment growth or max employment). So the time inconsistency problem is not solved by these means. There’s no inherent reason why investors would start to trust mugabe’s regime just because he sets up an independent central bank. Nor would Raghu Rajan’s ability to control inflation be very different if the RBI was given formal autonomy. Similarly, investors would expect the UK government to act responsibly even if it controlled monetary policy. For instance, the period of stable inflation in the UK started in the early 1990s and predates central bank independence.

    For what it’s worth, the correct comparison should be between QE as practised by the Fed and BoE, and PQE as proposed by Corbyn. Both are time-bound exercised carried out by the central bank, with a quantitative limit on the issuance of base money and constrained by the need to meet a price and employment stability mandate. The difference is that PQE is likely to be vastly more effective than QE, because it raises spending in the economy directly (either through government spending or through tax cuts). i don’t think this part is controversial or disputed. We are left then with the issue of who determines when this instrument is deployed and how – I would propose a joint committee consisting of the Treasury and the BoE, both of whom have to agree before a positive recommendation to deploy can be made to the Chancellor, who then must get Parliamentary sign-off.

  12. mrkemail2 says:

    Weimar and Zimbabwe? What has that got to do with this?

  13. mrkemail2 says:
    There is an alternative setup here than is both democratic and independent, solving all problems 🙂

  14. NeilW says:

    You are championing the rule of a bunch of unelected bureaucrats over the will of the elected demos.

    The central bank is not an abstract entity. It is a bunch of people running things. Quite literally a Court.

    We fought a constitutional crisis against that in 1910. That is why the House of Lords has no veto over a budget passed by the commons. And since they are unelected they already had the ‘time consistency problem’ covered. It was rejected by the people then, and it should be now.

    To try and reinforce that is both bad politics and bad economics.

    If you are championing central bank independence then you are indeed antidemocratic. You are championing the autocratic rule of the One True Way above that of debate and democracy in an elected chamber.

    If you want that why not campaign for the abolition of the other parties and just have the one. Then there will be no change of government, no time inconsistency, no delay in getting decisions and all the other ‘benefits’ of central bank ‘independence’. That approach was very popular in the 1930s in certain countries if I recall and the end outcome wasn’t very pleasant.

    Attempting to downgrade parliament to the status of a parish council is an appalling abuse.

    We do not run the country for the benefit of businesses. They are allowed to do business in our country for the benefit of us. Which means that the sovereign elected parliament rules over everything. If it wants to make a mess of things, then it can do. It was elected by the people to enact their will. Which may very well not be to businesses liking. Hard luck.

    We’re tired of the ‘business confidence’ arguments. They were debunked thoroughly by Kaleki in the 1940s. We’ve heard enough from corporate shills.

    Time for a different approach that puts real people at the centre of things.

    Parliament decides, and the executive executes. HM Treasury and the Bank of England are operational departments of government that deliver those instructions. There is no sensible constitutional, political or economic structure where the central bank should be allowed to override the settled will of parliament or the permitted instructions of the executive. None.

    As Bernanke rightly pointed out when he was chair of the Federal Reserve: “we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do”.

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