The Kapali Carsi

Turkey’s contribution to the independence of central banks debate

Central bank independence is deeply engraved into the hearts and minds of almost all economists and is one of the must-haves for a sound macroeconomic policy. Or it used to be up until very recently.

Economist Joseph Stiglitz recently challenged that notion by noting Jan. 3 that “in the crisis, countries with less independent central banks, including China, India and Brazil, did far, far better than countries with more independent central banks like Europe and the United States.” With the Bank of Japan’s independence under threat the issue is now a hot topic.

In my latest Hurriyet Daily News (HDN) column, I discuss Turkey’s contribution to this debate. You can read the whole thing at the HDN website, but if you’d like to get a good summary of the debate first, I recommend the Tim Duy post I hyperlinked in the column.

I would like to start this short addendum with comments from a reader:

Define what an “independent central bank” is, please? After all, in a democracy, who is expected to determine economic policy, if not elected governments? Should it be determined by unelected for profit private corporations like the FED? Obviously, the FED is not “independent”. It like all private central banks are dependent on private, not public interests.

The belief that the Fed is for profit and protect the interests of Wall Street, and more generally that central banks serve financiers, is a common misconception, but one which I won’t delve into. In fact, as Alex Tabarrok argues, low inflation favors lenders, so you could argue there is some bias towards banks with an independent central bank aiming for low inflation.

But I completely agree with the reader that “the independent central bank” is an illusion. In fact, this is the other main point Stiglitz was making- unfortunately, I could not get into this in the column because of space constraints. In the article I hypelinked above, Tim Duy argues rather forcefully that “the central bank serves the public, and the latter only grants independence if the former is adequately meeting the needs of the public.” This means that central bank independence is ultimately tied to job performance.  If you apply this reasoning, the Bank of Japan is simply reaping what it sowed in the last two decades and deserves losing its independence. Here’s more from him:

Ultimately, the monetary authority is a creation of the electorate. It retains the illusion of independence so long as its actions are consistent with the conventional wisdom of the public.

Switching gears, Gillian Tett of the Financial Times discusses an interesting paper that shows under what conditions central bank independence doesn’t make sense: When both the  private and public sector are deleveraging. More details on the paper are in an FT Alphaville blog post by Izabella Kaminska. But before you jump to conclusions, the paper is manly about the U.S.: It doesn’t apply to small open economies that cannot print their own money, as she explains.

8 Responses to “Turkey’s contribution to the independence of central banks debate”

Deep PurpleJanuary 18th, 2013 at 12:57 am

Turkish central bank is a managing a hoax policy of "multiple monetary targets & managed fx float" on the back of the global liquidity provided by FED and other cashiers.. Within the world of all keynesian central banker magic , this one is the mother of all scams..Time will come and these guys will go down in the fumes with their real estate bubble blowing government masters.

edeliveliJanuary 18th, 2013 at 6:55 am

WOW, and I thought I was outspoken!:) But I completely agree with you that central bank-induced liquidity is making the Central Bank of Turkey's magic look like it is working. The real estate bubble, and the shift from industry it has caused, is a major concern, too- in fact, I was planning to write on that for Monday's column…

girls hotMay 12th, 2013 at 2:46 pm

The dependence on foreign capital means that when capital inflows slow, economic activity slows sharply, leading at times to hard landings. This in turn can pose risks for financial stability, and underscores the importance of ensuring a sound macroprudential framework.

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Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (, he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

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