(Page 4 of 45) - Paper Autonomy, Private Ambition: Theory and Evidence Linking Central Bankers' Careers and the Economy authored by Adolph, Christopher.

the neglect of their preferences. This faith—implicit in studies of central bank independence
that presume legal declarations of policy objectives will be followed as a matter of course—is
paradoxical for a literature centered on the inability of the government to faithfully execute the
long-term interests of its own principals. As McCallum (1995) notes, constitutional directives to
the central bank to pursue low inﬂation may only “relocate” the time inconsistency problem, since
the government has no more incentive to enforce such commands than it has to resist inﬂationary
policies in the ﬁrst place. Moreover, given an independent central bank with an oﬃcial policy
goal, it is unclear what the government could do to police or clarify the mission of a wayward
central bank, short of the costly step of changing the law itself.

It is the very nature of agent

independence to give the principal as little power to enforce as to override.

Contrast this murky delegation problem with the hopeful view of Alan Blinder, an economist

and former Vice Chairman of the Fed, that central bankers (and political agents generally) check
their preferences at the door:

It is not necessary to ﬁnd a “truly conservative” central banker whose personal value of the
parameter α [the amount of output the central banker is willing to sacriﬁce to lower inﬂation]
is excessive; you can simply direct the central bank to behave as if α were higher. In either
case, central bankers set aside their own personal beliefs about what is best for society (α or

k [the ideal inﬂation rate]) and adopt instead parameter values that lead them to “do their
duty.”

Blinder concedes that “Homo economicus may not behave this way. But responsible people, put
in positions of authority, do.” (Blinder, 1997, p. 14)

Blinder served on the FOMC, so his views cannot be dismissed out of hand. But from a

principal-agent perspective, Blinder’s claims ring hollow. First, compared with their political
principals, central bankers enjoy faster access to economic data and specialized staﬀ studying
monetary policy questions. Information asymmetry is central to arguments for bureaucratic
dominance of policy, and it is easy to imagine that political principals tasked with dozens of
policy problems may not even be aware that agents are implementing policies the principal would
oppose if he knew more (Peters 1981, Weir and Beetham 1999). Second, Blinder’s “responsible
central banker” must not be subject to the unconscious biases that may follow each agent’s
unique experience, knowledge, and interests. Instead, he can tweak the “preference function in
his head” at the drop of a hat. Finally, the legal strictures on central bankers tend to leave
substantial wiggle-room; Blinder himself laments the lack of discussion and consensus on targets
and weights by the FOMC (Blinder 1997, 5). When the law does not say precisely what α and
k should be, there is no reason to expect all will interpret—or want to interpret—the law in the
same way. If agents can use the law to rationalize their pre-existing policy preferences, they are

The European Parliament has learned how hard it is to hold an independent central bank “accountable”.

Unfortunately, despite the spate of articles on central bank accountability, basic questions—what does it mean to
be accountable, who shall enforce accountability, and how—remain foggy (ironically, the meaning of the subsidiary
concept of “transparency” is particularly contentious; see, e.g., the debate between central bankers Buiter [1999]
and Issing [1999]). Moreover, central bank accountability, proposed in an era of low inﬂation and prosperity,
remains wholly untested—there is not yet even an anecdote regarding a central bank which was held to account,
or changed its monetary policy because of accountability institutions (like legally deﬁned targets).