Central Bank Independence – Independence from Whom?
Monetary Policy isn’t Neutral
Prof. Louis-Philippe Rochon hits the nail on the head—in a tweet that is short and to the point:
Central Bank Independence (CBI) was always a theoretical concept. In reality, the Fed works closely with the Treasury, and there is considerable interactions.
But what is happening lately with Lisa Cook is a whole new level of interference. Post-Keynesian criticism of CBI is about the first, not the second point.
Yes, I agree.
Independence from whom?
In theory: CBI is defined as independence from the government (e.g. no fiscal dominance, no political pressure to monetise deficits).
In practice: Central banks are deeply dependent on financial markets — because they implement policy through financial intermediaries, bond markets, repo markets, etc.
This means CBs end up listening to and reacting to financial signals (bond yields, stock prices, credit spreads) much more than to labor markets or wages.
“Intermediate Macroeconomics” (2025) Elgar Publishing and “Do Central Banks Serve the People” (2018) Polity Books
The Rentier Dependence
Who gains from high interest rates?
Creditors, bondholders, and financial asset owners — i.e. the rentier class.
Who loses?
Borrowers, workers (via higher unemployment), and governments with higher debt-servicing costs.
Thus, when CBs raise rates aggressively in the name of “price stability,” they are also shifting the distribution of income and wealth toward creditors.
In this sense, monetary policy isn’t neutral: it has a class bias.
The “Privatisation” of Monetary Policy
If central banks (CBs) are de facto guided by financial markets and the rentier class, monetary sovereignty gets hollowed out.
Instead of being a public authority pursuing broad social/economic goals, CBs risk acting as custodians of financial wealth.
Monetary austerity (tight policy to protect financial credibility) serves to:
Maintain the real value of financial assets.
Discipline labor (limit wage growth).
Constrain fiscal policy (because governments face higher borrowing costs).
Post-Keynesian Insight
CBI (an “inflation-first-policy”) is a myth with a bias: independence is never from markets, only from democratic governments.
During crises (2008, Covid, eurozone debt), CBs revealed their dependence by rescuing both governments and markets.
Outside crises, their policy bias tends to protect creditors over debtors — which is why many Post-Keynesians see monetary austerity as a political project, not a technocratic necessity.
Since limiting CBI to inflation is political and ideological in nature, I will refrain from posting further usual CBI index charts here. As a reminder, the majority of central bankers come from the financial industry, which essentially undermines the idea of independence («revolving doors»).
Some Findings
Central Bank Independence (CBI) is more myth than reality when the economy faces existential crises.
In such moments, central banks often re-align with governments to prevent collapse.
A few concrete examples from the Global Financial Crisis (2008) and the COVID-19 pandemic (2020–21):
ad) GFC (2008–2009)
Fed – Quantitative Easing (QE1, QE2, QE3): The Fed purchased massive amounts of UST and MBS.
In practice, this meant directly supporting fiscal policy (UST deficits ballooned as Washington bailed out banks and stimulated the economy).
Independence blurred: the Fed was effectively monetising Govt debt to stabilize markets.
Bank of England (BoE) – “Credit Easing” + Coordinated Stimulus
The BoE cut rates to near zero and bought gilts (Govt bonds), enabling the UK Treasury’s large deficit spending under Gordon Brown’s government.
European Central Bank (ECB) – Securities Markets Programme (SMP, 2010–2012)
Officially, the ECB is the most independent CB in the world. Yet during the eurozone sovereign debt crisis, it purchased large amounts of Greek, Portuguese, and Spanish bonds to prevent fiscal collapse. This was a highly political act, breaking its “no bailout” rule.
Note: Draghi’s 2012 statement — “whatever it takes to preserve the euro” — was more than a technical monetary-policy line. It was a deeply political commitment:
ad) COVID-19 Pandemic (2020–2021)
Fed – “Whatever it takes” partnership with US Treasury
The CARES Act (March 2020) created joint Fed–Treasury emergency lending facilities.
This was explicit fiscal-monetary coordination — a suspension of independence.
Bank of Japan (BoJ) – Yield Curve Control + Fiscal Alignment
The BoJ directly capped long-term bond yields while the government rolled out record stimulus packages.
The CB essentially guaranteed the state could borrow unlimited amounts at near-zero cost.
ECB – Pandemic Emergency Purchase Programme (PEPP): €1.85 trillion in bond purchases across sovereign debt markets.
Explicit aim: keep borrowing costs low for Italy, Spain, and other highly indebted states so they could afford pandemic relief.
Again, fiscal dominance over monetary “independence.”
Bottom line
In normal times, central banks project “independence” (focusing on inflation, price stability).
In crisis times, they re-fuse with the state, coordinating to protect employment, financial stability, and government solvency.
This shows why post-Keynesians argue CBI is more of a political construct than an economic reality.