RBA's Debelle Defends Bank Independence, Urges Stability Debate

  • ‘Goal of financial stability has generally been left vague’
  • Accountability to political process, public is key: Debelle

Reserve Bank of Australia Deputy Governor Guy Debelle strongly defended the importance of central banks maintaining independence, while calling for further research and discussion about how financial stability fits into their mandates.

Debelle contrasted the 2017 debate on independence with the situation two decades earlier when he and Stanley Fischer, who’s now Federal Reserve vice chairman, wrote about the issue. The RBA’s No. 2 official didn’t discuss Australian monetary policy or the country’s economic outlook, but he did take up the issue of whether objectives might need to be widened or more precisely defined.

“The goal of financial stability has generally been left vague,” Debelle said in the text of a speech prepared for delivery Thursday at an event in London marking 20 years of the Bank of England’s independence. “It is much harder to get agreement on what are the important elements of financial stability and how a central bank should go about achieving them. The long-lasting, and still very active, debate about whether the central bank should lean against the wind is the best example of this.”

Debelle, who earned his Ph.D. at Massachusetts Institute of Technology under Fischer’s tutelage, rejected the idea that independence meant fighting yesterday’s battle. He said the notions he and Fischer came up with in 1994 remain relevant: “The goal(s) that the central bank is pursuing should be determined by the political process. But, once given the goal, the central bank should be able to pursue the goal as it sees fit, with appropriate accountability.”

He said the distinction stands up to scrutiny 20 years later, and the U.K.’s macroeconomic results from the 1990s to 2007 validates the choice.

‘Separable Issue’

“Whatever failings led to the financial crisis and its long-lived consequences, I am not convinced that central bank independence was a contributing factor,” Debelle said. “One can question the central bank’s understanding of the functioning of the macroeconomy and the monetary policy transmission process, but that is a separable issue from the validity of independence.”

He insisted that accountability to the political process and the public was at the core of independence: To be able to take such decisions about the appropriate stance of monetary policy, a central bank has to appropriately justify them, he said.

“Financial stability is more an open question,” Debelle said. “Both the goal of financial stability and the instruments are much less clearly defined at present. While central bank independence in terms of monetary policy was all the rage in the first part of the 1990s, a similar focus in terms of financial stability today is warranted.”

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