Erik Thedéen: Central banks must constantly earn their independence
News Independent central banks contribute to a stable and prosperous economy, said Erik Thedéen when SNS and the Riksbank organised a discussion on central bank independence and mandates. However, this independence cannot be taken for granted. Central banks have to earn it by being transparent and performing their tasks in a respectful and determined manner.
In a conversation with former Bank of Finland Governor Erkki Liikanen, Governor Erik Thedéen talked about how, since the 1990s, central banks have increasingly been tasked by elected politicians with conducting monetary policy without regard to or interference from day-to-day politics. The reason for this was that economic policy in the 1970s had major problems in credibly combating high inflation.
“After that, we experienced a period of much more stable macroeconomic performance, with low inflation, economic growth and rising real incomes. The fact that the central banks were given their independence was an important reason for this.”
At the same time, Mr Thedéen pointed out that independence does not mean that central banks are free to do whatever they want. Elected officials determine the framework for the central bank and it is important that the central bank does not expand its tasks without political support.
“It is easy to get carried away when new economic policy issues top the agenda. Does this mean that the central bank should stay away from issues such as climate change, tariffs and fiscal policy initiatives? No, it does not. This is entirely dependent on the context and on whether there is a natural link to the Riksbank's tasks regarding price stability and financial stability.”
Mr Thedéen also emphasised that independence must be earned every day.
“This does not mean that the central bank should try to stay popular with politicians or the general public. In fact, confidence can increase if the central bank takes decisions that are unpopular but necessary and responsible. Putting away the candy bowl is rarely popular, although everyone recognises that it can be a wise decision.”
Finally, Mr Thedéen said that scrutiny of the central bank's work is important to ensure that its independence is democratically anchored.
“We need to be open and clear about the decisions we make and why. We also need to be generous with information about our activities.”