SBU Finance Professor Joins Top Economists in calling for Fed Independence

Academic research has shown that Central Bank Independence is important with respect to monetary policy.

Why? Because the politicians have the incentive to keep interest rates too low and money supply too high in order to keep the economy in high gear and thus get re-elected. This type of policy often leads to booms and bust cycles (not unlike what just happened) and inflation.

In light of the changing financial landscape that has come about as a result of our recent financial crisis, many politicians are pushing for a less independent Fed; more specifically a Fed that is more accountable to Congress.

A petition asking for the continued independence was to some of the top economists/financial economists in the country.

The petition (signed by over 350) read as followed:

"Open Letter to Congress and the Executive Branch

Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability. There are three specific risks that must be contained.

First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.

Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

If the Federal Reserve is given new responsibilities every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit"

The list of signers is here. The list includes (in no order)

Rene Stulz of The Ohio State University
Eugene Fama of The University of Chicago
Harold Demsetz of UCLA
Burton Malkiel of Princeton
Wayne Marr of Alaska-Anchorage (and SSRN fame)
Robert Merton of Harvard
Myron Scholes of Standford
Paul Asquith of MIT
Andrew Lo of MIT
Robert Hansen of Dartmouth
Maureen O'Hara of Cornell
Robert Shiller of Yale
Hal Varian of UC Berkley
Oh and SBU's own, Jim Mahar :) of BonaResponds and FinanceProfessor.com.