The Effectiveness of Central Bank Independence vs. Policy Rules

This paper assesses the relative effectiveness of central bank independence vs. policy rules for the policy instruments in bringing about good economic perfor-mance. It examines historical changes in (1) macro-economic 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 sta-bility. Both de jure and de facto central bank indepen-dence 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 indepen-dence 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