Central Bank Independence: A Balance Between Autonomy and Accountability

The Federal Reserve's independence is under scrutiny as President Donald Trump pressures Chairman Kevin Warsh to cut interest rates. However, some argue that central banks should not have complete autonomy and that there should be limits to their independence.

Claude Lavoie, a contributing columnist for The Globe and Mail, suggests that while operational independence makes sense, the mandate of a central bank should be set democratically, not by the bank itself. In Canada, the government and the Bank of Canada jointly agree to a 2-per-cent inflation target, but in the U.S., the Fed independently adopted a 2-per-cent inflation target in 2012 without congressional approval.

Lavoie argues that beyond who sets the mandate, there should be boundaries to central bank independence. Central banks need to work collaboratively with governments so that monetary and fiscal policy don't work at cross purposes. This means sharing information and coming to a common view on the economic outlook, not an independent one.

The author also suggests that central banks should require government blessing before taking actions that will have repercussions outside their mandate. Tools such as quantitative and credit easing have distributional and fiscal effects that arguably should be left to elected officials. Independence should not mean being free from accountability, and Lavoie notes that the Bank of Canada is not required to submit a corporate plan or budget to the federal cabinet.