Central Banking in a Democratic Society

In recent years we have seen the emergence of two important trends: an increase in the number of countries operating on democratic principles, especially with the abandonment of communism in the transition countries, and an increase in the independence of central banks. Indeed, many of the transition countries have granted their central banks a higher degree of legal independence than is seen in many other countries. At a glance, the independence of central banks seems to be in conflict with the democratic principle that government policies should be controlled by elected officials rather than by an elite group that is insulated from the political process. On the other hand, there is a strong case for independence of central banks to ensure that they take a long-run view and conduct monetary policy in an effective manner. This apparent conflict between these two views immediately raises the question of what the role of a central bank should be in the emerging democracies of the transition countries. What form should central-bank independence take? Can central-bank independence and democratic principles be reconciled? How can the central bank be made sufficiently accountable in a democratic society? Answering these questions not only is of importance in countries that have been democratic for a substantial period but is especially relevant in the transition countries of Eastern Europe, which are now in the process of designing their political and governmental frameworks.