LIKE many articles of faith, central-bank independence requires some suspension of disbelief. In most countries the central bank is a branch of government, which appoints its top officials and sets its goals. Yet in the decades after the 1980s, when governments began giving the institutions operational independence, that faith seemed to move mountains. The shift coincided with the “great moderation” era of low inflation and gentle business cycles. Indeed, central bankers came to be seen as near-omnipotent. The 2007-08 crisis reminded the public that the monetary titans are mortal. Yet for all the criticism they have faced since then, central bankers have less to fear from frustrated politicians and angry voters than from the cold logic of low interest rates.

What is so special, exactly, about an independent central bank? Support for their autonomy emerged as a result of the counter-revolution against Keynesianism of the 1970s, and is built on two related ideas. The first is that independence is necessary to preserve monetary restraint. Robert Lucas, a Nobel-prize winning economist, argued that when elected leaders exercise influence over interest rates,...Continue reading