The advent of quantitative easing by the world’s major central banks invites renewed questions about the meaning and role of central bank independence in an age of economic crisis. This article draws together insights from economic sociology, history and democratic theory to engage in further discussion about the proper role of central banks in democratic society. We stress some related themes. Our brief history of central banks aims to show how these banks have always been embedded in economic and political coalitions and conflicts, therefore qualifying the term independence; our study also aims to show that in satisficing between conflicting tasks, central banks need to maintain a balance between cognitive competences and normative expectations. Independence is better understood as a form of dependence on the coalition of interests that supported the financial climate prevailing before the global crisis of 2008, one of low wage-price inflation, high borrowing and debt, and loss of prudential control. We argue that independence amounts to a form of re-privatisation of central banks, and that they are increasingly suborned to the pressures of financial markets. At the same time, asset price inflation has sacrificed growth and employment and therefore prolongs the crisis. The economic measures now demanded by the financial crisis prompt new doubts about the independent central bank experiment, potentially in favour of the ex ante model of governmental oversight of central banks.

Spearheaded by the International Monetary Fund (IMF), there has been a rethinking of macroeconomic policies, in particular with regard to targeting inflation at a very low level in the wake of 2008–2009 global economic crisis. We provide a content analysis of the IMF Staff Reports on Article IV consultation of 12 Asian developing countries during the period 2009–2010 in order to see whether that rethinking has been reflected in the IMF’s advice. The findings of this study reveal that the IMF continues with its prescription of achieving low inflationary environment irrespective of country-specific circumstances.

This article proposes a unified framework for solving and estimating linear rational expectations models with a variety of frequency-domain techniques, some established, some new. The solution methodology is applicable to a wide class of models and leads to straightforward construction of the spectral density for performing likelihood-based inference. We also generalize the well-known spectral decomposition of the Gaussian likelihood function to a composite version implied by several competing models. Taken together, these techniques yield fresh insights into the model’s theoretical and empirical implications beyond conventional time-domain approaches can offer. We illustrate the proposed framework using a prototypical new Keynesian model with fiscal details and two determinate monetary–fiscal policy regimes. The model is simple enough to deliver an analytical solution that makes the policy effects transparent under each regime, yet still able to shed light on the empirical interactions between US monetary and fiscal policies along different frequencies.

This paper offers a reinterpretation of the Fed's time-varying implicit inflation target, based on two considerations. The first is that the need to alleviate the burden of distortionary taxation may justify the choice of a positive inflation rate. The second is based on compelling evidence that the degree of price and wage indexation falls with trend inflation. In fact, we find that a proper characterization of the joint evolution of fiscal variables and nominal rigidities has a strong impact on the Ramsey optimal policies, implying optimal inflation dynamics that are consistent with the observed evolution of U.S. trend inflation. By contrast, tax policies have been too lax, especially at the time of the controversial Bush tax cuts.

We present a set of research and briefly describe the individual contributions to the Macroeconomic Dynamics special issue on inequality, public insurance, and monetary policy.

Macroeconomic performance in the Economic and Monetary union (EMU) will be impaired if national fiscal policy flexibility and monetary flexibility of the ECB is limited, goods markets adjust sluggishly, labor mobility is low, and automatic stabilization from federal taxes and government spending is low. This paper analyzes the stabilization of output fluctuations induced by symmetric and asymmetric macroeconomic shocks in the EMU. It is shown how national fiscal flexibility and flexibility of the monetary policy of the ECB can stabilize fluctuations of the average EU business cycle that are generated by symmetric shocks. Furthermore, it is demonstrated how, under EMU, national fiscal flexibility and a system of fiscal transfers are able to stabilize differences in national business cycles that are generated by asymmetric shocks.