don't forget the power

Because Chris Dillow has spam-bucketed me again, like quite a few TypePad sites periodically do, this comment will go here instead. Chris discusses a paper claiming that fiscal stimulus will not work because the central bank will put up interest rates and the exchange rate will rise, and quite sensibly points out that it doesn't make sense to expect the exchange rate to rise in a punishing recession with a large budget deficit. (Unsurprisingly both Tim Worstall* and George Osborne believe this or at least make out like they do.)

Anyway, my comment is that if you look at this from a political economy perspective rather than a macroeconomics perspective it does make sense. Central bank independence, as an institution, is meant to reduce politicians' discretionary power over the economy. Therefore, it's not actually surprising that the central bank might be trying to counteract the decisions of the minister of finance. I mean, Jürgen Stark and friends designed the ECB specifically to implement deflationary policies in the event that the elected power wanted the opposite.

And why would politicians accept this? In a perspective of political economy, this might be because they felt the unelected power would serve their interests, because they felt it was stronger than they were and it would get its way, or because they were simply unaware of any contradiction. Of course, what we choose to be unaware of is a deeply political decision.

Further, a Kaleckian would say it does indeed make sense to look at central bank independence as an institution whose purpose is to prevent full employment.

*Bizarrely, Tim is or claims to be unaware that the European Central Bank is an independent central bank. Let's roll the tape:

“what on earth was the ECB doing raising interest rates this year?”

That’s the problem with government as a whole really isn’t it? Sometimes the idiots get in. Far better to have a system where the idiots can’t do any harm even if they do get in: you know, that minarchist state thing?

Tim Worstall: the only man on earth who thinks the European Central Bank is elected.