The principle that a central bank should set monetary policy free of direct political control, on the theory that elected officials face short-term incentives to inflate the economy for electoral gain, undermining the credibility of price-stability commitments. The idea drew heavily on New Institutional Economics work on credible commitment and time-inconsistency, and shaped the design of the Bundesbank, the Federal Reserve's statutory insulation, and the European Central Bank's founding treaty.
Facts
FieldMonetary Economics, Institutional Economics 1 Proposed ByFinn Kydland and Edward Prescott 2 Cross-Tradition Connections
Associated With
Critiqued Here
Why this is disputed. As a constituent agency of China's State Council rather than a statutorily insulated body, the PBOC is a standing reference case in the comparative literature on central bank independence, cited on both sides of the debate over whether formal independence is necessary for monetary credibility.
Associated With School
Formalized through New Institutional Economics work on credible commitment and the time-inconsistency problem in monetary policy.
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