Catching-up Strategies in CESEE Economies
Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 10: Central Banking for the 21st Century: An American Perspective
Paul A. Wachtel1 Central banks are peculiar institutions with one foot in the private sector and one foot in the government.2 In the United States, in particular, the central bank stands out as the extra-constitutional fourth branch of the federal government. It has considerable power which it can exercise without any significant formal review or interference from Congress, the President or any elected officials. Indeed, modern thinking about central banking gives enormous emphasis to the notion of central banking independence. Only a central bank that is independent of the political sphere will be able to maintain a consistent anti-inflationary policy stance. So, central bankers should not be subject to regular political review or oversight and should hold office for a long period of time. Some central banks were set up with this independent quasi-governmental status, such as the Federal Reserve System.3 Some evolved in that direction, such as the Bank of England, which was a private institution until it was nationalized by the post-war Labour government and then was not granted its policy independence until 1997.4 Towards the end of the 20th century, it seemed to many observers that a consensus view had emerged regarding the proper functions of a central bank. However, as is often the case, just when this happens something comes along to upset the consensus. And the recent financial crisis has thrown the issue wide open once again. A fresh examination of the history of central banks shows that our understanding of the role of central...
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