Central bank independence is a bit like marriage: Israel’s Fischer

April 18, 2013

For Bank of Israel governor Stanley Fischer, this week’s high-powered macroeconomics conference at the International Monetary Fund was a homecoming of sorts. After all, he was the IMF’s first deputy managing director from 1994 to 2001. The familiar nature of his surroundings may have helped inspire Fischer to use a household analogy to describe the vaunted but often ethereal principle of central bank independence.

Fischer, a vice chairman at Citigroup between 2002 and 2005, sought to answer a question posed by conference organizers: If central banks are in charge of monetary policy, financial supervision and macroprudential policy, should we rethink central bank independence?  His take: “The answer is yes.”

In particular, the veteran policymaker, who advised Fed Chairman Ben Bernanke on his PhD thesis at MIT, argued various degrees of independence should be afforded to different functions within a central bank.

While monetary policy should be more insulated – though it is not always – from politics, it might be appropriate for the financial stability function to entail greater coordination with fiscal authorities, as is the case in Israel. Which is where marriage comes in:

Some of my colleagues say, well, you can’t be independent in one role and not in another. Well, I don’t think any of them are married, if that’s what they say. You can be. There are things you do (separately) and there are things you do together.

I don’t see why you can’t be independent one way and not in the other.

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It strikes me that Fischer is an expert in marrying polar opposites. After all, he’s the one who wrote the theory that Keynesian economics and free market theories were compatible. He identifies as a Keynesian economist yet presided over the privatizing of Asia and Russia that stripped those countries of their assets and impoverished millions of people. He’s a Friedmanite wolf in sheeps clothing.

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