A world-wide shift over the last decade has seen governments grant greater policy independence to their central banks. For the most part, central banks have gained control over the instruments of monetary policy – ‘instrument’ or ‘operational’ independence – while governments have reserved the right to set central bank goals (see also chapter 7). As MacLaury argues, central banks these days are ‘independent within the government, not independent of the government’. Thus central bank ‘independence’ can be defined as the institutional capacity – typically derived from an institutional mandate, backed by government support – to conduct monetary policy free from significant government input or ‘meddling’. Governments may establish the goals of policy, or the ‘rules of the game’, but an independent central bank is free to conduct routine policy within this framework as it sees fit.

The global debate on central bank independence (CBI) began in the late 1980s. By 1993, one well-placed observer declared that it was ‘now an idea whose time has most certainly come’. Several countries, such as New Zealand, France and Britain, made high-profile legislative choices to grant policy-making independence to their central banks. The European Central Bank is now one of the most independent in the world: it is not formally accountable to any government.