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The Ethics of Delegating Monetary Policy

Jens van ’t Klooster, European University Institute

The global financial crisis of 2007 and 2008 transformed monetary policy, forcing central bankers to move far beyond

their pre-crisis instruments, goals, and expertise. In this article, I investigate these developments from a perspective of

normative democratic theory. Against authors who reject central bank independence entirely, I argue that it should in

principle be permissible for governments to delegate political choices to unelected experts. From a democratic per-

spective, what matters is whether the act of delegation serves the government’s ultimate economic policy aims. Al-

though central bank independence limits the government’s control over monetary policy, it can also improve monetary

policy and thereby help the government pursue its larger economic policies. I outline a moral framework for balancing

these competing considerations; focusing on the case of the European Central Bank, I then argue for democratic reform

of existing institutions.

y creating an independent central bank, the govern-ment delegates authority over monetary policy to un-elected experts. Within the confines of their price sta-

bility mandate, these experts routinely weigh the benefits ofeconomic output against the long-term cost of inflation. Some-times, their decisions can be momentous. After the Brexitvote, for example, the value of the pound fell and the Bank ofEngland expected inflation to exceed the target assigned to itby the government. Governor Mark Carney and his Mone-tary Policy Committee faced a choice. They could either in-tervene by raising interest rates or accept inflation and pro-tect the real economy from a major economic shock. In theend, the bank decided not to intervene, arguing that to dootherwise would raise unemployment by 250,000 (Carney2016). History is filled with such dramatic decisions (Greider1989; James 2013; Marsh 1993).

In this article, I argue that today’s independent centralbanks are insufficiently democratic and need to be reformed.This claim has a long tradition, but the argument I advance isnovel. In contrast to those who reject central bank indepen-dence entirely, I argue that it should in principle be permis-sible for governments to delegate political choices to unelectedexperts. Froma democratic perspective, whatmatters is whetherthe government has an adequate justification for its decisionto delegate. Although central bank independence limits thegovernment’s control over monetary policy, it can also im-prove the quality of monetary policy and thereby help the gov-

Jens van ’t Klooster (jens.vantklooster@eui.eu) is a Max Weber Fellow at the EuThis research was made possible by a PhD position funded by the Dutch R

The Journal of Politics, volume 82, number 2. Published online January 23, 202q 2020 by the Southern Political Science Association. All rights reserved. 0022-

ernment to pursue its larger economic policies. In what fol-lows, I will first outline a moral framework for balancingthese competing considerations and then make a detailedcase for democratic reform of existing institutions.

In arguing for this claim, I pay specific attention to thehistorical changes catalyzed by the 2007/8 global financial cri-sis. Before the crisis, central bankers referred to their era as thatof a “Great Moderation” (Stock and Watson 2002). They as-sumed that recent economic policies had created a new periodof weaker economic recessions and stable prices. Within theconfines of their mandate, central bankers would do little morethan control interest rates on short-term credit. This was con-sidered sufficient for steering the domestic economy to itsnatural equilibrium. In the words of one central banker, “ev-erything was simple, tidy and cozy,” but, as he ominously con-tinues, today “many certainties have gone” (Borio 2014, 191).

The crisis has transformed monetary policy, forcing cen-tral bankers to move far beyond their narrow areas of ex-pertise. Central banks now experiment with a wide range ofnew instruments commonly referred to as “unconventional”monetary policy. They have given out trillions in cheap loansand extended their trading to a broad range of financial assets.The European Central Bank lends to oil and gas companies,car manufacturers, and low-cost airlines. The Bank of Japan isa big player in Japanese stock markets. Central bankers cur-rently debate even more experimental policies, such as givingoutmoney to citizens directly. The crisis has also raised heated

ropean University Institute, San Domenico di Fiesole, FI.esearch Council (NWO) for project 360-320-10 Trusting Banks.

0. https://doi.org/10.1086/7067653816/2020/8202-00XX$10.00 000

000 / The Ethics of Delegating Monetary Policy Jens van ’t Klooster

debates about the goals of monetary policy, with stable pricespitted against financial stability and economic equality. De-spite facing different, and much more complex, politicalchoices, central banks have retained their pre-crisis indepen-dence, and their monetary policy mandates remain virtuallyunchanged. This situation is untenable and reform is overdue.

Despite the political importance of their decisions, centralbanks have received much less attention from political the-orists than more familiar forms of executive, legislative,and judiciary power.1 Central bankers make their own kindsof distributive choices. Moreover, their status as unelectedexperts raises deep questions about the relationship betweenpolitical authority and democratic legitimacy. The powers ofcentral bankers deserve sustained treatment, and my aimhere is to address this gap in the philosophical literature. Thecontribution of the article to existing work on central bankindependence outside philosophy consists in its focus onmandates and the normative ideas that underpin democraticgovernment. Economists have focused on the economic ef-fects of independence (de Haan and Eijffinger 2016). Politicalscientists have focused on documenting the autonomy ofcentral bankers in relation to elected governments (Fernández-Albertos 2015). I draw on these accounts but put forward anentirely new framework that clarifies the moral issues at stake.

I have three aims. The first is to describe the discretionof central bankers over both the goals and the instrumentsof monetary policy. Against the claim that central bankersmerely follow a legal mandate, I argue that these mandatesare often vague and leave crucial questions unanswered.Long before 2008, central bankers had surprising discretionin putting forward their own interpretation of their man-date and acting on it.

This descriptive account leadsme tomy second aim, whichis to develop a normative framework for evaluating the del-egation of monetary policy to an independent central bank. Itshould not be assumed that the powers of central banks areillegitimate simply because central bankers are unelected.Delegating monetary policy can hinder governments fromachieving their economic policy goals. I describe this worry asone concerning domestic economic sovereignty. But, if centralbanks make good use of their powerful tools, delegation isitself an effectivemeans for achieving economic policy goals. Idescribe these benefits in terms of the quality of monetarypolicy. I argue that it should be left to elected governments to

1. Philosophers have discussed financial stability (James 2012; Linarelli2017), the domestic and global distributive effects of unconventional mon-etary policy (Fontan et al. 2016; Reddy 2003), the central bank’s role in publicfinance (Douglas 2016), and democratic accountability (Best 2016; van ’tKlooster 2018).

balance loss of economic sovereignty against improvements tothe quality of monetary policy.

Finally, I draw on this framework to argue that centralbank independence in its present form is no longer justifiableand needs to be reformed. I do this by outlining the argumentsfor central bank independence that were prevalent beforethe crisis, and I show how these fit the framework that I putforward. Focusing on the case of the European Central Bank,I demonstrate that new instruments used by central banks,and the new goals that they pursue, create considerable lossof economic sovereignty. With regard to the quality of mon-etary policy, I argue that central bankers lack special com-petencies for carrying out their new tasks well. Delegationstands in need of justification, which can only be successfulif the governance of central banking is reformed.

THE POWERS OF THE CENTRAL BANKBy creating an independent central bank, governments dele-gate authority over one of the state’s most powerful policytools to unelected experts.2 In this section, I describemonetarypolicy and argue that within the confines of their mandate,independent central banks have considerable scope to makepolitical choices.

Monetary policy is the use of the central bank credit anddeposit facilities to pursue macroeconomic policy aims. Inearlier days, the most important asset traded by central bankswas gold, but today monetary policy is implemented throughtrading in low-risk financial assets, such as sovereign bonds.Conventional monetary policy uses such trading to controlshort-term interest rates in financial markets. By introducingmoney into the financial system, the central bank lowers in-terest rates. By selling assets it has previously purchased, thecentral bank removes money from the market, thereby in-creasing rates.

These trades do not involve legal sanctions or coerciveforce. Still, monetary policy can have far-reaching conse-quences for citizens.When interest rates go down, more creditwill be available and will be offered on more favorable terms.Conversely, higher interest rates incentivize saving at the ex-pense of debtors. Interest rates directly influence the optionsfor saving and borrowing available to citizens and firms. Forordinary citizens, most of the impact of monetary policy isindirect and mediated by macroeconomic conditions. Wheninterest rates go down, consumption and investment pick upand employment increases. As this process plays out, priceseventually rise. Conversely, an increase in interest rates causes

2. My interest here is in a legal notion of authority. Following the lit-erature on central bank independence, the term “government” is throughouttaken to refer to elected government and to exclude the central bank.

.

3. Bank of England Act 1997, sec. 12.4. The Reserve Bank of New Zealand Act, sec. 9(1).5. Bank of Japan Act no. 89 of 1997, art. 2.6. Colombian Constitution of 1991, art. 31.7. Reserve Bank Act of 1959, sec. 10(2).

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economic output to contract and the rate of inflation to de-cline. To give an idea of the size of its effects: a decision toincrease the Federal Reserve’s target interest rates by one per-centage point is estimated to reduce industrial productionby 4.3% over a two-year period (Romer and Romer 2004; butcf. Coibion 2012). In this scenario, prices remain unchangedfor the first two years, after which they gradually fall to 6%below where they would have been otherwise. In the years af-ter the central bank raises rates, companies will go bankrupt,workers will lose jobs, and wages will be lower. Monetary pol-icy also affects public finances through its effect on tax reve-nues and sovereign bond markets. High interest rates canthus easily preclude the expansion of government spending.

It is notoriously difficult to use monetary policy to targetspecific macroeconomic outcomes. Economists refer to thecausal pathways that connect operations of the central bank tomacroeconomic outcomes as the “transmission mechanism.”This mechanism consists of different routes via which inter-est rates influence consumption, investment, and, ultimately,prices. The complexities of this mechanism, however, areprofound. For one, the different effects of a single change inmonetary policy can pull in different directions. For another,some of these effects will materialize only after a few years.Because of the wide range of direct and indirect effects, mon-etary policy lacks any clear distributional pattern (Coibionet al. 2017). The effects of a change in one nation’s monetarypolicy also extend far beyond its national borders (Reddy2003). Because of the time lags and the wide range of possiblecausal pathways, debates about monetary policy take placeagainst a background of empirical disagreement and uncer-tainty (Dow 2004; Greenspan 2004). For these reasons, settingmonetary policy is one of the most difficult economic policydecisions that a capitalist state faces.

The complexity of decisions concerning monetary policymakes some form of political representation unavoidable.Most citizens are not very aware of monetary policy, let alonesufficiently familiar with the transmission mechanism. Un-derstanding and reflecting on monetary policy requires bothexpertise and time, rarely available to those outside a narrowcircle of economic policymakers and finance professionals. Inthe absence of such knowledge, it is not possible to make aninformed choice on how to set monetary policy. Nevertheless,although this complexity makes decision making reliant onexperts, governments can draw on this expertise in manyways. The need for some form of technocratic judgment doesnot preclude democratic accountability.

When the central bank is independent, final authority overmonetary policy is delegated to a committee of officials withinthe central bank (Conti-Brown 2016; Cukierman 1992). Theseofficials are appointed rather than elected, and they are often

appointed on the recommendation of the bank itself. Fur-thermore, positions on central bank boards and committeescome with long, fixed terms, and once a committee member isappointed, only serious acts of misconduct are cause for dis-missal. Parliamentary control of central bank expenditures islimited or nonexistent (Binder and Spindel 2017). An inde-pendent central bank is simply created once and for all by alegal mandate, which the bank’s officials are largely free tointerpret themselves. In this system, accountability takes theform of providing a legal justification for policies, with limitedor no opportunity for elected officials to object. Indeed, cen-tral bankers are even expected to obstruct government policieswhere their mandate requires this. The guiding question inthis article is whether this status quo should be retained.

A crucial assumption underlying that question is thatcentral bankers make important decisions on political issues,but this assumption is itself controversial. By political choices,I mean moral choices on important and contested issues inpublic policy. Central bankers argue that where such choicesarise, the correct policy is determined by their mandate(Fontan, Claveau, and Dietsch 2016, 14; Issing 2002, 27). Inthis sense, central bankers often describe themselves as merelyinstrument independent—they are free to decide how to setmonetary policy—but not goal independent—central banksare strictly bound by the goals set out in the mandate (Debelleand Fischer 1994). The goal of stable prices is given to themand central banks merely decide how to use the instruments ofmonetary policy to realize that goal.

In practice, however, their mandates leave central bankerswith broad discretion not only over the instruments they usebut also over the goals they pursue. In nearly all cases, theirlegal mandates leave considerable room for interpretation.The Bank of England is an outlier, in that its mandate requiresthat the government communicate annually its (nonbinding)understanding of what price stability means.3 In New Zea-land, the central bank negotiates the ultimate target with thegovernment.4 Most other central banks, however, interprettheir mandate themselves. The most austere mandates simplystate that the central banks should pursue a price stabilityobjective. For example, the Bank of Japan Act states thatmonetary policy should be “aimed at achieving price stability,thereby contributing to the sound development of the na-tional economy.”5 Despite some differences in formulation,“currency purchasing power,”6 “stability of the currency,”7

000 / The Ethics of Delegating Monetary Policy Jens van ’t Klooster

“achieve and maintain price stability,”8 goals set out in thelegal mandates of other nations’ central banks are similarlyvague and derive their meaning from interpretation alone.This vagueness is compounded by the fact that mandatesoften contain multiple goals. The European Treaty assigns tothe European Central Bank a primary objective of main-taining price stability and a secondary objective of support-ing “the general economic policies in the Union with a viewto contributing to the achievement of the objectives ofthe Union.” In theory, these objectives include “cultural andlinguistic diversity” and “peace, security, the sustainabledevelopment of the Earth.”9 Similarly, the US Federal Re-serve is mandated to “promote effectively the goals of max-imum employment, stable prices, and moderate long-terminterest rates,”10 but the mandate itself provides no guidanceon how to deal with conflicts between these various goals.

Today, major central banks such as the European CentralBank and the Federal Reserve interpret their widely differentlegal mandates as requiring what is known as “flexible infla-tion targeting” (Bernanke et al. 2001). Central banks pursuethe goal of inflation targeting, in the sense that they see it astheir primary objective to keep prices stable. Specifically,prices of consumption goods are meant to increase by nomore than one to three percentage points annually, where thisincrease is measured over a time horizon of a few years.Central bankers are very hesitant to pursue economic policyaims that are incompatible with the inflation target.

The inflation target is flexible, however; the central bankdoes not respond to every potential deviation. Because raisingor lowering interest rates is a blunt tool that has far-reachingand unpredictable consequences, central banks are reluctantto use it. Rather, the central bank weighs the benefits of policyinterventions against their cost in terms of other aims such asemployment and growth. By occasionally deviating from astrict priority of price stability, a central bank creates a bettertrade-off between inflation, employment, and economic out-put than if it were to mechanically follow a rule.

In making these kinds of decisions, independent centralbanks are responsible for momentous decisions in economicpolicy. This paper’s introduction included a dramatic exam-ple of this in the Bank of England’s decision to allow inflationto rise above target after Brexit. In contrast, the GermanBundesbank did not allow inflation to rise in response to re-unification, thereby causing a deep recession (Marsh 1993;Marshall 1999). In pursuing a policy of flexible inflation tar-geting, central bankers have always made political choices.

8. Act on the Magyar Nemzeti Bank, art. 3(1).9. Treaty of the European Union, art. 3(3) and 3(5).10. Federal Reserve Act 13, as amended 1977.

Even so, I will argue that the global financial crisis marks animportant shift in how we should think about central bankindependence. Central bankers now pursue their policyaims with a much broader range of instruments and juggle abroader set of goals than they did before the crisis. Beforediscussing these new challenges, I develop a moral frame-work for reflecting on the permissibility of central bankindependence.

THE PERMISSIBILITY OF INDEPENDENCEIndependent central banks are created by governments. Iftheir operations are legitimate, they are so because govern-ments have delegated their authority over monetary policyto them. In this section, I ask under what conditions it ispermissible for democratic governments to delegate mone-tary policy to an independent central bank. I criticize theview that political choices should never be left to unelectedofficials. Instead, I argue that it should be left to elected gov-ernments to decide where delegation is required. Govern-ments should do this by weighing competing considerationsof economic sovereignty and the quality of monetary policy.If the government can justify its decision to delegate, thenthe powers of central banks are legitimate.

As far back as 1964, economist Paul Samuelson testified tothe US Congress that the independence of the Federal Re-serve was incompatible with the ideals of democratic gov-ernment: “There can never be a place in American life for acentral bank that is like a Supreme Court, or 1831 House ofLords—truly independent, dedicated to the public weal butanswerable for its decisions and conduct only to its owndiscretion” (US Congress 1964, 1105). Because experts areunelected, Samuelson thinks, their decisions should in thefinal instance be accountable to, and reversible by, demo-cratic governments. I call this claim “Samuelson’s principle.”

There is a long tradition of critics across the political spec-trum siding with Samuelson in criticizing central bank in-dependence.11 In the same congressional hearings, MiltonFriedman argued that the Federal Reserve should be madesubject to a strict rule that would commit it to a fixed annualrate of monetary expansion (US Congress 1964, 1133–78).More recently, US lawmakers Rand Paul and Bernie Sanderstogether proposed tight congressional oversight of monetarypolicy meant to “Audit the Fed.”12 Progressive critics in par-ticular have often objected to central bank independence on

11. For a critical discussion of John Rawls’s democratic objections tocentral bank independence in the context of these 1960s debates, see van ’tKlooster (2019).

12. See, e.g., the Federal Reserve Transparency Act (H.R. 24 and S.2232).

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the grounds that it limits the power of democratically electedleft-wing governments to pursue active economic policies(McNamara 2002; Pixley, Whimster, and Wilson 2013; Way2000).

These critics combine substantive complaints about thegoals and instruments of monetary policy with objectionsthat invoke the ideal of democratic government. Whereassubstantive complaints are generally technical and based onempirical data, democratic objections tend to be vague, andthe exact nature of the democratic ideal at issue is often un-clear. My framework seeks to clarify the moral issues at stakein such democratic objections.

Before turning to this framework, however, I want to ex-plain why objections to central bank independence should notinvoke Samuelson’s principle. Specifically, Samuelson’s prin-ciple is inadequate because the delegation of political choicesto unelected officials is almost unavoidable, often desirable,and, in itself, not undemocratic.

Delegation of at least some political choices is unavoidablebecause there are simply not that many elected officials. It istrue, of course, that the number of elected officials could (andprobably should) be extended, but there are limits to howmany officials can be elected. In particular, there are limits tohow many of those elected will have the expertise required toset monetary policy. It is of course possible to elect centralbankers, but this kind of solution does not work across theboard. Rigorously applied, Samuelson’s principle would pro-hibit not only central bank independence but also a broadrange of other independent regulatory agencies such as com-petition and antitrust authorities, financial market supervi-sors, and environmental commissions. It would also prohibitthe delegation of war to the military.

For similar reasons, delegation of some political choices tounelected officials is often desirable. In cases where electedofficials recognise that they lack the expertise and time tomake good decisions, they rightly desire to delegate powers toofficials with the relevant expertise and time.

Finally, Samuelson’s principle makes the permissibility ofdelegation a matter of constitutional principles, and therebylimits, rather than strengthens, democratic politics. This isbecause a government that, in its capacity as the electedrepresentatives of the people, deems it best to delegate itsmonetary policy to an independent central bank, would nolonger be able to do so. Moreover, Samuelson’s principle alsoobstructs citizens fromhaving their voice heard in shaping thepolitical process. Independent central banks have often heldstrong popular support for their particular constitutional role.Rather than contributing to democratic rule, adhering toSamuelson’s principle unduly limits the political options opento democratic governments.

It is this last objection that I take to be decisive from ademocratic perspective. Whether or not monetary policyshould be left to an independent central bank is itself acontested political issue on which citizens should have a say.The institutions of central bank independence place partic-ularly stringent limits on the ability of governments to in-fluence monetary policy. But monetary policy is also uniquein its complexity and its impact on the lives of individualcitizens. Deciding whether to delegate monetary policy bringsup a wide range of practical and moral issues, and it is pre-cisely to make these kinds of difficult decisions for whichgovernments are elected in the first place. It should be up toelected governments, drawing on supporting democratic in-stitutions, to weigh the competing benefits, costs, and risk ofcentral bank independence. It is up to its critics to object tothat justification. The final judgment is to be made in thelegislative arena. If voters are unhappy with the decisions oftheir elected representatives, they can vote them out in favorof politicians advocating a different position.

The ideal of democratic government should thus not beinterpreted as entirely prohibiting delegation to unelectedofficials. Neither can it simply be assumed, however, thatdelegation is always permissible. At the very least, as a part ofdemocratic politics, delegation is subject to the democraticdemand that governments justify their decisions. A politicaljustification must be adequate in that it is based on plausibleempirical premises and reasonable moral beliefs.

The aim of the framework I develop below is to evaluatethe adequacy of such a justification. A government could haveall sorts of motives for delegating monetary policy, but at leastsome of these will not be suitable for justifying delegation. Forexample, critics have argued that central bank independenceis meant to surreptitiously privilege the financial industry’sinterest in low inflation over wider societal interests in eco-nomic growth and low unemployment (McNamara 2002;Stiglitz 1998; 2016, 145–46). Justifications of central bankindependence tend not to invoke such considerations, forgood reason. My framework clarifies what counts as a soundjustification of central bank independence.

The framework has two important features. First, itassumes that economic policy should as a rule be left to thefinal authority of democratic governments. This assumption,which is widely held in democratic societies, is importantbecause it allows me to show that in the absence of a goodargument to the contrary, monetary policy should remain inthe hands of elected governments.

Democratic theorists have put forward at least three typesof consideration in favor of this democratic default. First, le-gitimacy. Elections provide governments with a mandate toact in the face of conflicting moral beliefs (Christiano 1996;

000 / The Ethics of Delegating Monetary Policy Jens van ’t Klooster

Habermas 1996). Without such a mandate, citizens wouldrightly feel that decisions were arbitrarily imposed on them.This sentiment would also hinder the effectiveness of thepolicies that governments seek to enact. The second concernsinformation processing (Estlund 2008; Knight and Johnson2011; Parkinson and Mansbridge 2012). Through politicalparties and other institutions, elected governments are em-bedded in larger systems of public deliberation. This meansthat they receive information on a broad range of policy topicsfrom different perspectives. More specialized, bureaucraticforms of representation limit deliberation to a narrow circle ofexperts. Finally, democratic procedures contribute to thesubstantive quality of policy (Arneson 1993). Facing regularelections, governments need to ensure that a stable coalitionof voters favor their policies. This forces governments to takethe interests of citizens into consideration in a way that un-elected elites are not required to do.

The assumption that elected governments are best placed torepresent citizens is, admittedly, optimistic (for a more pessi-mistic perspective, see Achen and Bartels [2016] and Brennan[2016]). But, the assumption is weaker than Samuelson’sprinciple and does not imply that governments are always bestplaced to represent citizens. Moreover, even on this optimisticaccount of democratic institutions, it is still entirely possible tojustify the creation of an independent central bank. For thenarrow task of setting monetary policy, central banks maysimply do better than elected governments in representingcitizens. If central banks have a democratic mandate, moretechnical competencies, and the rightmotivation, it is certainlypossible that central banks do better all things considered.This, according to my framework, is the sort of case thatgovernments need to make.

The question of how to design a central bank and itsmandate cannot be decided in isolation from the broadereconomic policy goals of a government. The second importantfeature of my framework is that it leaves it up to governmentsto decide whatmonetary policy is to be used for and to explainhow an independent central bank allows the government toachieve its goals. The framework explains when the delegationof monetary policy is an adequate means toward achievingthose aims. Again, the approach delineated here reflects thestatus quo in which economic policy is in the hands of electedgovernments. It also receives support from the considerationsin favor of elected governments already outlined.

According to my framework, a successful justificationmust balance two competing considerations. The first is oneof (domestic) economic sovereignty (Dietsch 2011; Krasner1997). Economic sovereignty is the power of elected govern-ments to realize their economic policy aims. When a legisla-tive body creates an independent central bank, it limits the

powers of the government in two ways. First, the governmentgives up one of its most powerful economic policy tools.Through monetary policy, governments can potentially in-fluence conditions in financial markets and thereby realize itseconomic policy aims directly. Second, monetary policy cansupport expenditures by lowering borrowing costs in financialmarkets. Still, it is not clear that delegating monetary policymust result in a dramatic loss of economic sovereignty. Acentral bank that follows a mandate may pursue policies thatare not very different from the preferred policies of the gov-ernment. The questions to ask concerning economic sover-eignty are: (i) What policies are made unavailable to thegovernment by granting a central bank independence? And(ii) which of these policies would the government have pre-ferred to pursue had the central bank not been independent?

The second consideration concerns the quality of mone-tary policy. Where delegation does lead to loss of economicsovereignty, this should be compensated by improvements tothe quality of the policy making that results from delegation.A discussion of the quality of monetary policy must explainboth what a good use of monetary policy is and why centralbankers can be expected to pursue such a policy more effec-tively than the government itself. Historically, governmentcontrol of the money supply has had disastrous consequenceson the daily lives of citizens, but so has bad policy by inde-pendent central banks. Margaret Thatcher’s monetary policy,pursued in opposition to the Bank of England, wiped out 15%of British industry and led to largely avoidable job loss for1.5 million workers (Needham 2014). TheWeimar Republic’sReichsbank is infamous for its contribution to German hy-perinflation between the wars. It is an issue of considerabledebate whether Helmut Kohl was right to leave monetarypolicy to the independent Bundesbank during reunification(Marsh 1993; Marshall 1999).

Importantly, the quality of monetary policy should notonly be measured in terms of its outcomes. As I will show,central bank independence can be taken to contribute totransparency and accountability, which are both valuable intheir own right, as well as to support inclusive democraticdeliberation. Again, it should be up to elected governments todecide how such procedural virtues should be weighed againstcompeting outcome-based criteria. In attempting to drawlessons from historical experience, the key questions concern-ing quality of monetary policy are: (i) What does good policymaking consist in? And (ii) what features of an independentcentral bank contribute to good policy making?

In sum, a satisfactory justification of central bank inde-pendence should show that any loss of economic sovereigntyis justified by an independent central bank’s contribution tothe quality of monetary policy. There is no simple rule for

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weighing these competing considerations. My claim here isthat this type of decision should, in the end, be made andjustified to citizens by elected governments. It is up to them tojustify the decision to citizens.

CENTRAL BANKING BEFORE AND AFTER THE CRISISDelegatingmonetary policy to an independent central bank ispermissible if the government can meet the demands of jus-tification outlined in the previous section. By contrast, whenexisting practices can no longer be justified, they need to bereformed. In this section, I argue that traditional argumentsno longer justify existing practices and that justificationsalong the same lines will not be successful. From this I con-clude that existing practices are indeed in need of funda-mental democratic reform. Drawing on my framework, I firstoutline the arguments for central bank independence that areprominent in the literature. These arguments aim to establishthat central bank independence does not lead to loss of eco-nomic sovereignty and improves the quality of monetarypolicy. The rest of the section will show how these argumentshave been undermined by changes in central bank practicesand the broader context of economic policy since the financialcrisis. To illustrate the ways in which central banking has beentransformed by the crisis, I focus on the European CentralBank, which is exceptional for not being the central bank ofone country. But, the European Central Bank is not excep-tional in using new instruments and pursuing an increasinglybroad range of goals. These new developments in Europe andelsewhere, I will now show, not only create considerable lossof economic sovereignty for national governments but alsoundermine the reasons for thinking that delegation improvesthe quality of monetary policy.

13. For a critical discussion of this argument from a perspective ofdistributive justice, see van ’t Klooster (2019).

Central banking before the crisisAn extensive literature that justifies central bank indepen-dence is to this day part of textbooks, policy debates, andacademic research. My aim here is to show that the mainarguments of this literature fit my framework.

Regarding economic sovereignty, arguments justifyingcentral bank independence begin with themonetarist premisethat monetary policy should aim for price stability (Bernankeet al. 2001; Friedman 1968). It is then argued that, becausethere can be little debate over what monetary policy shouldultimately aim for, loss of economic sovereignty will beminimal. A first argument for the monetarist premise is that,as I showed in the previous section, conventional monetarypolicy is difficult to predict and lacks a clear distributionalpattern. This makes it an ineffective tool for the purposes ofallocation and distribution. If monetary policy has any use,

it is for stabilizing the level of economic activity, such as, forexample, maintaining price stability. Second, there are rea-sons to aim specifically for price stability. Stable nominalprices facilitate long-term economic planning and make theoutcome of contracts, understood in real terms, fairer. Pricestability also contributes to economic efficiency. Third, tar-geting stable prices does not preclude stabilizing other aspectsof the business cycle. Deflation results from high unemploy-ment and underutilization of economic capacity. High infla-tion, conversely, follows periods of low unemployment andoverutilization of economic capacity. A central bank thatfollows a strategy of flexible inflation targeting will also pursuethe general economic policy aim of macroeconomic stabili-zation. Finally, invoking Friedman’s expectation-augmentedPhillips curve, it is argued that ignoring inflation is unsus-tainable.13 If the central bank does not take price levels intoaccount, it may achieve short-term gains in employment andoutput, but changing inflation expectations will ultimatelyundermine the efficacy of monetary policy. In sum, accordingto the traditional arguments, pursuing price stability is simplya sensible part of economic policy, and an inflation-targetingindependent central bank does not, therefore, reduce eco-nomic sovereignty.

Defenders of central bank independence also argue that itimproves the quality of monetary policy. They draw on threeimportant lines of argument to support this claim.

One set of arguments focuses on accountability and trans-parency (Bernanke et al. 2001; Cukierman 1992). Account-ability means being held to a clear standard in setting mone-tary policy. Transparencymeans providing a clear justificationfor policies. A government that controls the central bank canuse monetary policy for a broad range of purposes. Because ofits technical complexity, accountability and transparency ofgovernment monetary policy will be limited. An independentcentral bank operating on a legal mandate has a clear policypriority and needs to justify its operations in light of that pri-ority. In this way, keeping central banks independent makesmonetary policy more accountable and transparent than ifleft to governments.

Second, there is an argument from moral competency. Inthe context of flexible inflation targeting, to have moralcompetency is to be motivated in the right way to achieveprice stability and other goals of monetary policy. Govern-ments, so the argument goes, lack patience and the ability toconsider long time horizons. Central bankers, in contrast, willbe more adequately motivated to set monetary policy for the

14. German constitutional court in Karlsruhe (BvR 2728/13) and Euro-pean Court of Justice (C-62/14).

000 / The Ethics of Delegating Monetary Policy Jens van ’t Klooster

long term (Blinder 1999; Issing 2002, 27). Perceived lack ofmoral competency also gives rise to a problem of time in-consistency (Kydland and Prescott 1977). Governments willprefer low inflation in the long run but find it difficult tomakea credible commitment to price stability. In response, privateeconomic agents anticipate, and thereby create, high inflation.By contrast, delegation to a central bank with a clear pricestability mandate allows the government to commit crediblyto price stability.

The third set of arguments focuses on technical compe-tency. To have technical competency is to know how toachieve price stability and other goals. Deciding on monetarypolicy requires an understanding of the transmission mech-anism. In point of fact, most elected officials lack these tech-nical competencies, which limits their ability to judge thepolitical issues. Although elected officials could in theory relyon empirical advice from central bankers, it is often difficultto communicate inconclusive empirical evidence in a value-neutral way (Douglas 2009; John 2015). In these circum-stances, central bank independence ensures that technicalcompetencies are effectively used in deliberation.

Central bank independence has always had its critics(Forder 2000; McNamara 2002; Stiglitz 1998), but taken to-gether these arguments have historically been widely accepted.I will not take a position on whether or not they should everhave been deemed adequate. Rather, I will now argue thattimes have changed: economic policy and the practices ofmonetary policy have evolved to undermine the force of thetraditional arguments.

The instruments of central bankingTo begin, consider the instruments ofmonetary policy. Beforethe crisis, monetary policy was largely implemented by settingshort-term interest rates. The European Central Bank (ECB),on which I will focus here, fulfilled its mandate by providing arelatively fixed amount of credit, which was secured by low-risk collateral, to a small group of banks. Now, however, theECB chooses from a far wider range of tools.

First, in the crisis, the ECB sought to save European banksfrom default and boost their profitability. After the bank-ruptcy of Lehman Brothers, the short-term credit markets inwhich the ECB normally set interest rates were severely dis-rupted. In response, the ECB started providing short-termcredit in any amount requested by banks (Giannone et al.2012). The ECB also loosened its requirements on the col-lateral that banks pledge for these loans. This provided morefunding to troubled banks but also involved accepting greaterrisk of financial losses. Through so-called currency swap lines,the ECB borrowed from the Federal Reserve to provide Eu-ropean banks with emergency loans in dollars (Allen 2013).

With hundreds of billions in cheap credit, the ECB sought toimprove the profitability of the banking sector and therebyboost credit provision.

Second, the ECB became an important creditor for Euro-zone governments. In response to dramatic spikes in theborrowing costs of member states, the ECB reluctantly tookup a role as lender of last resort in stabilizing sovereign bondmarkets. The ECB bought €185 billion in Greek, Irish, Italian,Portuguese, and Spanish bonds. The ECB also sent letters toindividual heads of state to “advise” them on labor marketreforms and other contentious matters of economic policy.These measures were contested because article 123 of theEuropean Treaty explicitly prohibits lending to individualEurozone governments. In a high-profile court case, the ECBdefended its operations as falling under its price stabilitymandate.14

Third, the ECB has expanded its monetary policy withso-called quantitative easing, or “QE” (Haldane et al. 2016;Lombardi and Moschella 2016; Williams 2014). In QE op-erations, the central bank buys financial assets to lower long-term interest rates. When the QE program ended in Decem-ber 2018, the ECB had spent a total of €2.6 trillion on mostlypublic but also private sector bonds. The program restarted inNovember 2019 for an indeterminate time. Quantitative eas-ing is contested because it raises the value of financial assets,ownership of which is concentrated in the top 5% of house-holds (Bank of England 2012; Montecino and Epstein 2015).It is also feared to lead to asset price bubbles. More recently,attention has turned to the Corporate Securities PurchaseProgramme as a part of which national central banks pur-chased bonds in nonfinancial firms. These purchases are con-tested because they have the potential to increase the profit-ability of individual firms. National branches of the ECB havefocused purchases on gas and oil companies (in Spain andItaly) and car manufacturers (in Germany). Bond purchasesalso feature the controversial Austrian gambling companyNovomatic, the French luxury firm LVMH, and the Irish low-cost airline Ryanair. Sustainable energy sources are entirelyabsent from the Corporate Securities Purchase Programme(CEO 2016).

The ECB is not the only central bank to have dramaticallyextended its range of monetary policy tools (Fernández-Albertos 2015). At the height of the crisis, the emergencycredit that the Federal Reserve committed to provide totalled$7.7 trillion. All major central banks take part in swap linesand many have built up large investment portfolios as part of

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their policies. The size of the ECB’s quantitative easing iscomparable to similar programs in the United States andUnited Kingdom. Its operations are much smaller than thoseof the Bank of Japan, which currently buys 90% of newlyissued government bonds and is a top-10 shareholder in 40%of companies listed on the Japanese stock market (Tomita2018).

Debate is now picking up on the use of evenmore powerfulunconventional tools. In theory, the central bank can increaseprivate spending by printing money and transferring it di-rectly to individual citizens (Turner 2015). Others argue thatcentral banks should buy bonds from the domestic develop-ment banks to fund public infrastructure and thereby en-courage economic activity.15

To what extent do these changes undermine economicsovereignty? While the immediate crisis measures were con-sequential, it is not clear that governments would have madedifferent choices. This is not the case for the instruments thatcentral bankers have turned to more recently. Most of thesetools are far less blunt and can be used to target individualstates, firms, and even citizens. By leaving these powerful in-struments in the hands of central banks, governments lose acrucial dimension of economic sovereignty. A government withmore control over these new instruments of monetary policywill be better placed to achieve its economic policy aims.

The goals of central bankingThe same is true when we consider the goals of monetarypolicy. In interpreting its mandate, the central bank opera-tionalizes the aims of monetary policy and determines howto deal with trade-offs between different goals. The traditionalarguments assume that monetary policy is used to pursue astrategy of inflation targeting while at most occasionally con-sidering economic output and employment. The mandate ofthe European Central Bank is, as I already mentioned, generaland vague where it concerns the goals of monetary policy. Be-fore the crisis, price stability provided monetary policy with arelatively uncontested ultimate target. In 1998, the GoverningCouncil of the ECB issued a press release specifying the ulti-mate target as a medium-term inflation rate below 2%. A 2003press release modified this aim to an inflation rate below, butclose to, 2%. This decision, which the treaty does not explic-itly assign to the ECB, raised few eyebrows.

The crisis has cast doubt on the importance of price sta-bility, however, and led the ECB to juggle a much wider rangeof goals. First, the ECB currently operates at the very limits ofwhat can still be described as flexible inflation targeting. De-

15. This was, e.g., proposed by the British Labour Party under thelabel “People’s QE.”

spite its unconventional monetary policies, the ECB has hadgreat difficulties maintaining its target. From mid-2013 tillNovember 2016, Eurozone inflation has been below 1% and,despite months of negative rates and asset purchases, was stillat 1.2% in April 2018. It remains difficult to describe ECBpolicy over the past years as achieving the avowed 2% target.

Second, there is now much more disagreement on thesocial cost of inflation and the measures that are justified tomaintain price stability. Economists disagree over whethercurrent low inflation is acceptable, or whether the ECB shouldin fact domore, or, as others believe, even less. They also debatewhether 2% is indeed the right target after all or whether ahigher or perhaps a lower target might be preferable (Williams2014).

Third, the distributive consequences of monetary policynow feature much more prominently in economic policy de-bates (Fernández-Albertos 2015). The mandate of the ECBwas developed at a time when economic inequalities wereconsidered transient or even unavoidable aspects of economicgrowth. This is no longer the case, and, as a result, the questionof the distributive effects of monetary policy is currently at thecenter of economic policy debates. As already noted, quanti-tative easing operations increase the value of financial assets,and it is far from clear that these effects are transient (Haldaneet al. 2016; Montecino and Epstein 2015). Given the natureof the monetary policy instruments currently in use, a centralbank that does not take economic inequalities into accounthinders Eurozone governments from pursuing progressive dis-tributional goals.

Fourth, in the wake of the crisis, central banks have ac-quired a broad range of new roles that can conflict with thegoal of price stability (Zsolt and Merler 2013). In the case ofthe ECB, I have already discussed (1) lending to banks thatlose access to market funding, (2) lending to Eurozone govern-ments that lose access to market funding, (3) adjusting col-lateral policy to support banks, and (4) implementing quan-titative easing operations. Other roles that I have not yetdiscussed include (5) designing, approving, and monitoringfinancial assistance to member states; (6) supervising indi-vidual banks; (7) stress testing the Eurozone banking sector;(8) reporting on new potential risks to financial stability;(9) surveillance of member states in line with new EU fiscalrules; and (10) acting as an agent for the European StabilityMechanism (the Eurozone’s crisis prevention fund). The ECB’sstated monetary policy goals would require it to privilege pricestability over other roles at all times, but it is not clear that this isnow happening, nor whether this is in line with the economicpolicy of Eurozone governments.

Finally, there is a close interaction between decisions oninstruments and goals. It canmake sense to pursue the goal of

16. Chambers (2004) and Pettit (2004) argue in different ways forremoving deliberation from wide public participation. Dahl (1989, 65–66)and Urbinati (2010) argue against.

17. Treaty on the Functioning of the European Union, art. 283(2).

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price stability with one instrument but not with another. Forexample, a government may prefer lending targeted at greeninvestments to loans that merely increase the provision ofmortgages. If only the latter option is available, that govern-ment may oppose pursuing price stability.

In sum, even if the monetary policy goals agreed before thecrisis were relatively uncontroversial then, this is no longer thecase now. As a consequence, the existing narrowmandate andits interpretation by the ECB has been, and will often be, atodds with the economic policies of Eurozone governments.Other central banks, which face similar circumstances andbalance a wide range of new competencies, have been forcedto confront similar questions. In the new era heralded by thefinancial crisis, existing institutions of central bank indepen-dence thus entail a considerable loss of economic sovereignty.

Central banking practices are unlikely to return to the pre-2008 status quo. The past decade has seen a turn away fromderegulation and market-based policies toward more activeeconomic management and government intervention. Eco-nomic inequality and financial stability are now firmly rootedin the political agenda, and for good reasons. Moreover, evenfor the narrow goal of price stability, it has become clear thatsetting short-term interest rates is not necessarily a sufficientmeans to achieve this. As interest rates approach 0, policymakers need tomake difficult decisions onwhat instrument touse and what goals to pursue. A government that can influ-ence the goals of monetary policy will be in a much betterposition to achieve its economic policy aims.

The poverty of central bank deliberationIn the future, central banks will often use the instrumentsavailable to them to pursue goals that conflict with the pre-ferred economic policies of governments. In these new cir-cumstances, central bank independence threatens to be a con-siderable impediment to economic sovereignty. Following myframework, we must now ask whether this can be justified byconsidering the benefits of central bank independence for thequality ofmonetary policy. If it turns out that central banks aresimply much better at dealing with their new challenges, thenit would be permissible, maybe even mandatory, for govern-ments to delegatemonetary policy and refrain from interfering.

The plausibility of that possibility depends on both howone defines goodmonetary policy and what reasons one has tothink that central bankers are best placed to make it. Evalu-ating this claim raisesmany tricky issues, for example, whetherclosed-group, depoliticized deliberation is to be preferred overpublic debate where complex issues such as monetary policyare concerned. To develop a decisive case for democraticlegislation over expert rule will require a much more in-depth

investigation than is possible here.16 Instead, I will argue in thissection that none of the three main lines of argument forthinking that central bank independence improves the qualityof monetary policy continue to hold true.

Before 2008, central banks had clearly defined goals, whichthey could pursue by means of one instrument. As we haveseen, central banks now have many more instruments to usein pursuit of a much less clearly defined set of goals. In ad-dition to undermining economic sovereignty, these develop-ments also cast doubt on the three lines of argument in favorof delegating authority to central banks.

For one, central bankers lack clear moral and technicalcompetency to meet their new challenges. In pursuing a nar-row mandate of price stability, central bankers needed a nar-row set of moral and technical competencies. The crucialmoral competency was to value low inflation, while the cru-cial technical competency was to understand the transmis-sion mechanism. To pursue a broader range of goals, centralbankers need more diverse moral and technical competen-cies, and it is far from clear that they currently possess them.Positions on central bank boards are mainly taken up by civilservants and finance professionals. Data on 20 central banksof developed countries shows that between 1950 and 2000,95% of board members were men and 47% had never had ajob outside finance or bureaucracy (Adolph 2013, 70). Cen-tral bank positions often explicitly require such a professionalbackground. For example, the European Treaty prescribesthat “members of the Executive Board shall be appointed . . .from among persons of recognised standing and professionalexperience in monetary or banking matters.”17 Central bank-ers will therefore have career incentives closely tied to bu-reaucratic and finance positions. Because inflation reducesthe real value of financial assets, price stability is of particu-lar importance to the financial industry. It is then not sur-prising that central bankers with a finance background preferhigher interest rates than those with a government back-ground (Adolph 2013, 116). Finance-related career incentivesmay perhaps be compatible with realizing a narrow price sta-bility mandate, but they raise conflicts where wider publicinterests are at stake. Moreover, contemporary career tra-jectories mean that central bankers are generally trained in anarrow set of economic policy competencies. Their technicalexpertise will be drawn predominantly from the discipline

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of economics, and, more specifically, from the fields of mon-etary and financial economics. Such competencies are stillneeded, but adequate deliberation on monetary policy in thetwenty-first century will require a wider range of professionalbackgrounds.

The current situation also raises important questions ofaccountability and transparency (Binder and Spindel 2017;Braun and Hoffmann-Axthelm 2017). Under the status quo,central banks have extensive freedom to deliberate on the goal,strategy, and instruments of monetary policy. Such delibera-tion, which occurs through creative interpretations of theirmandates, takes place in a closed committee and with limiteddemocratic accountability. In the absence of a clear mandatefor new policies, justifications provided for policy choicesoften aim at legal permissibility rather than explaining therationale behind the choice itself.

In the absence of a clear mandate and procedure thatfacilitates deliberation, reasoning about monetary policy isimpoverished. Consider again its distributive effects. From theperspective of existing mandates, any consideration of theseeffects is subordinate to the pursuit of price stability. Centralbankers rarely discuss the topic of economic equality, down-play its significance, and tend to focus on its role in thetransmission mechanism (Fontan et al. 2016). Adequate de-liberation on distributive effects would require weighing thecosts of increased inequality against the importance of thingslike price stability and low unemployment. Today, however, ifcentral bankers want to consider the distributive effects oftheir policies, they are forced to cloak their arguments interms of their price stability mandate; conversely, if centralbankers ignore distributive effects entirely, they unduly im-poverish their moral deliberation. The interpretation of aprice stability mandate is not the appropriate medium forsettling these types of complex distributive issues, but ignoringthem is not appropriate either.

CONCLUSIONCentral banking today no longer fits the pre-crisis justi-fications, which were formulated in entirely different his-torical circumstances. These justifications no longer establishthat central bank independence improves the quality of mon-etary policy and does so without undermining economicsovereignty.While nothing I have said precludes central banksretaining some degree of independence, the onus is now onelected governments to rethink central bank mandates. Thestatus quo can be reformed to introduce more democraticdecision making in at least three ways. First, mandates can beamended to extend the goals of monetary policy and explainhow they should be weighed against each other. Second,

governments can have more say in deciding on the use ofinstruments and weighing conflicting goals. Third, centralbanks can extend their expertise and modify existing careerincentives. Most likely, a combination of all three is needed.Rather than suggesting a distinct way forward, my claim hereis that this decision should be left to elected governments,who represent citizens in weighing competing considerationsand justifying their decision to the electorate.

ACKNOWLEDGMENTSFor their comments on earlier version of this article, I wouldlike to thank Anna Alexandrova, Gabriele Badano, Will Bate-man, Boudewijn de Bruin, Ben Folit-Weinberg, Clement Fon-tan, Maxime Lepoutre, Jessica Kaplan, Marco Meyer, AlexOliver, Johan Olsthoorn, Martin O’Neill, Joshua Preiss, EricSchliesser, Chris Thompson, Anahí Wiedenbrüg, and JackWright.

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