After the financial crisis, they were praised as saviours and their leaders were sometimes even lauded for their communication talent and vision. Yet central banks are now drawing fierce criticism, to the extent that they must sometimes take on the role of scapegoat for policies for which they had to offset the inadequacies. Arguably, they deserve “neither this excess of honour, nor this indignity”.
This policy paper is not intended to discuss policies but rather focuses on the independence of central banks. Endowed with a level of relative autonomy upon their creation, compatible with their twofold financial and sovereign role, they only became officially independent in the 1980s. This development reflects a clear drive by governments to delegate the conduct of monetary policy to officials protected from political vagaries, in a better position to act as a credible nominal anchor. The widespread application of independence is inseparable from that of inflation targeting policies. In the space of a few years, independence, which had long been considered of little relevance, became a consensual institutional standard.
However, the de jure or de facto broadening of central banks’ responsibilities during and after the crisis and in particular their pivotal role in the macro-prudential field weakened this consensus and gave rise to new questions: do these functions come under their statutes and remit? Can independent institutions which are essentially technocratic be legitimately involved in decisions which, going beyond financial stability in its strictest meaning, influence the allocation and redistribution of income or wealth? Do they not run the risk of heading towards potential conflicts of objectives, to the detriment of their primary goal of price stability? Is there not ultimately a misuse of power?
It appears that the question of legitimacy is not raised regarding monetary policy, which is generally subject to a clear mandate entrusted to central banks by political authorities or by means of a treaty. However, the extremely accommodating policies conducted ten years after the crisis (and their underlying strategies) have become the focus of often virulent controversy and hostile reactions have been expressed in relation to central banks. Yet one condition of their actual independence (as for any non-democratically elected institution) is to enjoy a relative consensus, if not unanimous support, with regard to their legitimacy, objectives and the resources rolled out to achieve them.
In addition to their statutory obligations and a form of communication that is often highly formatted, central banks should now meet the increased requirements of transparency and accountability, more in line with their actual responsibilities. This paper makes some proposals as to how this may be achieved.