Can Central Banks Be More Insulated from Politics?

At a moment of increased government involvement in the economy, the solution we need might be a more independent central bank. Politicians are not known for behaving unpredictably. When they do, it is usually for a reason. Thus when Germany’s Chancellor, Angela Merkel, publicly criticized three of the world’s leading central banks-the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England-in a June 2 speech in Berlin, journalists and policy-makers around the world looked up and took notice. It was not just that Merkel decided not to speak in the hushed, polite tones that politicians usually reserve for any discussion touching upon central banks’ conduct of monetary policy. Merkel’s Berlin speech drew attention for two reasons: first, her forthright criticism of the policies currently being pursued by the Federal Reserve and the Bank of England; second, her claim that the independence of some central banks, including the ECB, has been compromised as a result of political pressures.