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The Effectiveness of Central Bank Independence vs. Policy Rules

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Abstract

This paper assesses the relative effectiveness of central bank independence vs. policy rules for the policy instruments in bringing about good economic performance. It examines historical changes in (1) macroeconomic performance, (2) the adherence to rules-based monetary policy, and (3) the degree of central bank independence. Macroeconomic performance is defined in terms of both price stability and output stability. Both de jure and de facto central bank independence at the Federal Reserve are considered. The main finding is that changes in macroeconomic performance during the past half century were closely associated with changes in the adherence to rules-based monetary policy and in the degree of de facto monetary independence at the Federal Reserve. But changes in economic performance were not associated with changes in de jure central bank independence. Formal central bank independence alone has not generated good monetary policy outcomes. A rules-based framework is essential.

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  1. John B Taylor
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Prepared for presentation at a panel for the National Association for Business Economics at the American Economic Association Annual Meeting, San Diego, California, January 2013.

*John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution. He is Director of the Stanford Introductory Economics Center and has served as director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow. Taylor served as senior economist on the President’s Council of Economic Advisers from 1976 to 1977, as a member of the President’s Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office’s Panel of Economic Advisers from 1995 to 2001 and served as a member of the California Governor’s Council of Economic Advisors from 1996 to 1998 and 2005 to 2010. From 2001 to 2005, he served as Under Secretary of Treasury for International Affairs. His latest book is First Principles: Five Keys to Restoring Americas’ Prosperity, winner of the 2012 Hayek Prize. Among many awards over his career, he received the Adam Smith Award from the National Association for Business Economics in 2010. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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Taylor, J. The Effectiveness of Central Bank Independence vs. Policy Rules. Bus Econ 48, 155–162 (2013). https://doi.org/10.1057/be.2013.15

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