Rethinking Central Bank Accountability in Uncertain Times

As the dust has settled following the 2008 financial crisis and the economic dislocations that ensued, it has become clear that central banks have gained considerably in authority— using highly unorthodox tools to stimulate the economy, taking a greater role in financial regulation, and putting themselves in more politically sensitive positions, such as with the European Central Bank’s participation in the troika negotiations with Greece. It is not that surprising, therefore, that the question of central bank accountability is back on the table. As the “Buttonwood” column notes in The Economist, “Janet Yellen and Mario Draghi are very important players in the world economy, arguably more important than the US president or the German chancellor. And yet they are not elected; if voters do not like the job they are doing, they cannot get rid of them.”

Political accountability is not a concept that we usually associate with central banks. This is no doubt in part because we see monetary policy as a technical rather than political domain, and are therefore comfortable leaving these decisions to the technocratic expertise of unelected central bankers. And yet, there is of course a great deal at stake in decisions about monetary policy. It is during moments of crisis—such as the Volcker shock of 1979, when the U.S. Federal Reserve raised interest rates to 20 percent, or the recent financial crisis—that the power of central bankers to dramatically shape economic policy is put on public display. Although this power is usually much subtler and more incremental, it is still very real. Decisions about monetary policy have significant political effects: they define the broad direction of the economy, create particular kinds of incentives, and influence distributional outcomes. Although central banks are tasked with pursuing the health of the economy as a whole, the specific policies that they adopt have uneven costs and benefits for different groups. Consider, for instance, the different reactions of a prospective first-time home buyer and a retired couple living on their savings to the prospect of yet another drop (or increase) in the interest rate.

Of course, central banks’ mandates are broader than their responsibility for monetary policy: they also play the crucial role of lender of last resort in a crisis, and many have recently begun to expand their mandate into new, more politically sensitive areas, such as ensuring financial stability through macro- as well as microprudential regulation. As these mandates have expanded, there has been some recognition that these new activities might require additional forms of accountability. I argue here that, given the considerable power central banks wield, even if we set aside the more expansive roles that certain central banks have taken on recently and focus only on their bread-and-butter activity of setting monetary policy, greater democratic accountability is essential.

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