INTRODUCTION

The success of delegating the achievement of price stability to an operationally independent central bank has been regarded as so manifest in the OECD countries where this regime has been adopted, the question is now often posed, why not also delegate fiscal policy to an independent fiscal authority (see Blinder 1998, 59)? My answer is that almost every fiscal decision involves choices between priorities and objectives, among them macro stability, micro efficiency, and distributional effects, to name but three. The essence of politics is to make such difficult choices, and that should not, in my view, be delegated to an unelected, primarily technical body.

In my lifetime, the most crucial change that has occurred in our way of thinking about the working of the macroeconomic system was the shift from a belief that the Phillips curve remained downward sloping, even in the longer term, to a belief that it would become vertical (Friedman 1968; Phelps 1970). Given the former downward-sloping Phillips curve, there remained choices to be made, essentially political choices, about the “best” combination of inflation and output. With a vertical Phillips curve, all that monetary policy could deliver in the medium and long term was price stability. Moreover, periods of severe price instability, whether of high and variable inflation or of deflation, were inimical to growth.