The Post-Pandemic Inflation and Central Bank Independence

The ongoing post-pandemic inflation burst has put the monetary policy framework, its governance alternatives, and the evolution in central banking to a critical test. investigates the causes of this inflationary process and explores the extent to which central banks may have contributed to it. Specifically, it analyzes the impact of the evolution towards a more politicized yet independent model of central banking over the past two decades on the inflation burst. The study identifies four fundamental causes of central banks' failures: (i) radical uncertainty generating a kind of force majeure; (ii) epistemic-functional limitations of modern central banks; (iii) the influence of systematic biases or external dominance over central banks; and (iv) ideational shifts. Three main institutional alternatives are compared: politically subordinated monetary governance, traditionalist central bank independence with strict separation, and a novel model of pluralistic independence. The paper evaluates how each alternative performs in terms of the four fundamental causes and their ability to contribute to and effectively manage the inflationary process. It concludes that the pluralistic model, of political yet independent central banks, represents the superior alternative for governing monetary and financial policies. The pluralistic model of central bank independence is more (or at least equally) likely to: (i) facilitate superior coordination of macroeconomic policies in response to unprecedented shocks; (ii) mitigate epistemic-functional failures and expedite the belated responses; (iii) maintain a credible commitment to price stability as the primary policy objective; and (iv) use negative protections and competition of influences to withstand external pressures and risks of political, fiscal, or financial dominance. However, this inflationary episode provides valuable learning points for enhancing central banking practices and dealing with the foreseeable challenges in the more demanding advanced stages of the fight against inflation. It is anticipated that this episode will contribute to complete the learning and maturation process of pluralistic central bank independence