Watson, M. (2002). "The institutional paradoxes of monetary orthodoxy: reflections on the political economy of central bank independence". Review of International Political Economy, 9, 183-196. http://www.ingentaconnect.com/content/routledg/rrip/2002/00000009/00000001/art00007
“Academic studies of central banking typically divide into one of two traditions. For some, central bankers have shown that, once trusted to operate policy autonomously, they can consistently deliver low and stable inflation at no obvious cost in terms of output and employment…For others, however, this is to overemphasize the economic dimension of CBI” (183). CBI, in effect, is a tool derived from the political realm. Watson is here concerned with examining the literature on CBI, then showing that CBI can lead or promote problematic policy and then attempts to show that CBI was an effect of political pushing and pulling as opposed to economic drivers.
“The core of the intellectual case for CBI revolves around the assumption of a persistent inflationary bias built into politicians’ monetary policy preferences” (184). “There are two broad political economy challenges to this standard economic conclusion: one empirical, the other conceptual…The first…challenge suggests that CBI leads to superior inflation performance only when it is accompanied by labour market institutions that facilitate solidaristic wage bargaining…In contrast, the second…challenge suggests that the orthodox economics account of CBI mis-specifies the whole nature of monetary relations within contemporary capitalism” (185).
Watson then looks at the idea of path-dependency in the creation of CBIs, as well as the idea of a Grand Theory of CBIs. He finds that general theories of this sort are problematic. “…each time a general theory has been identified, it has been a different ‘general’ theory, which means that none of them have been actual, time-invariant, general theories at all” (189). While inflationary pressure has always been around, the nature and drivers of this pressure has changed as time progresses. On page 190 he provides a nice list of inflationary pressures by decade from the 60s to the 90s highlighting the different drivers that caused the pressure.
He looks then at the political logics for CBI. First, he highlights the issue of domestic distribution and finds that CBI is clearly a driver of distinct distributional policies, as credit is, in his words, “the sine qua non of distributional policies” (193). Additionally, he highlights how CBI is an “automatic pilot for policy” (193). This helps to shape the perspectives and expectations of market actors, and also provides for an outlet for unpopular policy interventions.
His first, economic conclusion, is that the assumption that CBI will create independent inflationary control misses the point that, “Money supply growth is determined as much by the actions of the private sector acting in its own interests as by the central bank acting in the public interest” (194). His institutional conclusion is that it is doubtful that CBI is the best institution to control for inflation. His political conclusion is that, “The decision to cede operational responsibility for the conduct of monetary policy should be seen as a statement of social intent” (195).
