01 December 2011

Why the ECB independence is detrimental in times of crisis

"the purposedly low level of direct political oversight in the area of central banking means that it is highly likely that independent central banks will have an intentionally high degree of agency slack [i.e.: in the form of slippage or shirking procedural problems identified in the Principal agent literature]
[...]
"such delegation may produce monetary authorities who pursue the goal of low inflation with too much zeal and thus have the potential to stave off needed growth and employment in the economy, without much leeway for the principals (i.e.: the governments) to correct this policy drift" (Mc Namara, 2002)

Precisely what's happening now with the ECB... the benefits of conservative central bank independence do not seem to have taken into account the risk of the concurrence of stable low inflation but falling output...

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