<abstract xmlns="http://www.w3.org/1999/xhtml"><p> The Central bank independence was viewed in the last decades as an essential prerequisite for ensuring good monetary policies. However, the global crisis of 2009 has shown that this concept was of little practical importance. The European Central Bank, which was built as one of the most independent central banks in the world, and the Federal Reserve System, a not so independent central bank from the point of view of legal independence, reacted in almost the same manner to the looming crises. Both of them used unconventional monetary policies, for which there was little theoretical support, to safeguard their economies. Quantitative easing, forward guidance and negative interest rate are now considered common instruments in the monetary authority’s arsenal. Moreover, central banks now have an extended goal, i.e. to provide financial stability. This means that they are expected to take action to prevent future economic crises by using monetary policy as a counter-cycle instrument. Given this important modification regarding the expected actions which must come from the monetary authorities, we argue that central bank independence becomes irrelevant in times of economic downturn, when they will use whatever means necessary to ensure financial stability. Political short run need will surpass long run stability as a priority for monetary decision makers.</p></abstract>

The Central bank independence was viewed in the last decades as an essential prerequisite for ensuring good monetary policies. However, the global crisis of 2009 has shown that this concept was of little practical importance. The European Central Bank, which was built as one of the most independent central banks in the world, and the Federal Reserve System, a not so independent central bank from the point of view of legal independence, reacted in almost the same manner to the looming crises. Both of them used unconventional monetary policies, for which there was little theoretical support, to safeguard their economies. Quantitative easing, forward guidance and negative interest rate are now considered common instruments in the monetary authority’s arsenal. Moreover, central banks now have an extended goal, i.e. to provide financial stability. This means that they are expected to take action to prevent future economic crises by using monetary policy as a counter-cycle instrument. Given this important modification regarding the expected actions which must come from the monetary authorities, we argue that central bank independence becomes irrelevant in times of economic downturn, when they will use whatever means necessary to ensure financial stability. Political short run need will surpass long run stability as a priority for monetary decision makers.

Central Bank Independence and economic crises: how both the fed and ECB managed to rely on unconventional monetary policies

Proceedings of the International Conference on Business Excellence

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

The Central bank independence was viewed in the last decades as an essential prerequisite for ensuring good monetary policies. However, the global crisis of...

Central Bank Independence and economic crises: how both the fed and ECB managed to rely on unconventional monetary policies

Published Online: Jun 15, 2018

Page range: 335 - 348

DOI: https://doi.org/10.2478/picbe-2018-0030

Keywords
unconventional monetary policy, central bank independence, ECB, Fed, quantitative easing, negative interest rate

© 2018 Mădălina Doroftei, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Central Bank Independence and economic crises: how both the fed and ECB managed to rely on unconventional monetary policies

Published Online: Jun 15, 2018

Page range: 335 - 348

DOI: https://doi.org/10.2478/picbe-2018-0030

Keywordsunconventional monetary policy, central bank independence, ECB, Fed, quantitative easing, negative interest rate

© 2018 Mădălina Doroftei, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
unconventional monetary policy, central bank independence, ECB, Fed, quantitative easing, negative interest rate