LONDON (MNI) – Bank of England Monetary Policy Committee Member
Adam Posen roundly rejected the idea that central banks engaging in
asset purchases compromise their independence.

Posen, highlighting recent criticism of the European Central
Bank’s bond purchases in the wake of the Greek crisis, said the critics
were more concerned with appearance than the economic outcomes
the ECB is trying to achieve.

As long as a central bank can choose if and when to make asset
purchases, and its head cannot be fired without due cause, it will enjoy
the anti-inflationary benefits of independence.

Posen argued that central banks avoiding asset purchases for purely
reputational reasons are acting like immature adolescents, not
responsible adults.

“Always refusing to intervene in debt markets for appearance’s sake
alone, regardless of the economic circumstances, is a sign of immaturity
or insecurity, not independence,” Posen said.

“Central bank independence is not primarily a matter of reputation,
but of reality – what matters is what central banks do, not whether they
maintain an appearance of public disdain towards the messy realities of
economic life,” Posen added.

The MPC member cited research showing the decline in average
inflation outturns associated with central bank independence can be
attributed to just two factors: “whether a central bank governor can be
fired (without cause) and whether a central bank can be forced to buy
government bonds directly (i.e. monetize debt).”

“The desirable reduction of average inflation outcomes associated
with central bank independence … comes from saying no at critical
moments, not from ongoing deterrence effects on expectations,” he said.

“The counter-inflationary credibility of central banks is not
fragile to voluntary purchases of bonds, public or private, made with
reference to clear economic (as opposed to political) justification,”
Posen added.

Posen said the benefits of central bank independence did not depend
on the precise mandate they follow, such as having only a price
stability mandate.

“Differences in mandates turn out to have no predictive power for
differences in inflation outcomes,” he said, and nor do the precise
terms and appointment processes for central bank governors. demonstrated
by what central bank independence does not do.

“Much of the hue and cry about central bank independence in
response to the various sorts of bond purchases is awfully shallow. It
is adolescent or worse to be so preoccupied with how someone looks, and
her supposed reputation among the self-appointed conformists, than with
the substance of her actions and values,” Posen said.

He defended the BOE’s extensive asset purchases, saying they were
“consistent with our mandate to deliver price stability.

The speech, at Barclays Capital 14th Annual Global Inflation-Linked
Conference, New York, contained no comments on the current UK economic
conjuncture.

–London newsroom: 4420 7862 7491; email:
dthomas@marketnews.com/drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]