First, there is the tendency for individuals to seek to economise on money holdings if inflation rises, referred to informally as “shoe leather costs”. Second, there is the suboptimal allocation of goods and services, reflecting the fact that the variability in relative prices tends to increase average inflation, induced by typically disperse menu costs to change individual prices. Third, there are distortions in tax systems which are typically not indexed to inflation. And, fourth, there are costs arising from a de-anchoring of inflation expectations, which reflects the fact that inflation is typically more difficult to predict in high inflation environments. The second insight is that in advanced economies central bank independence and inflation traditionally show a significant negative correlation. Regressions in support of this finding measure central bank independence by various indices which capture, inter alia, appointment and dismissal procedures of central bank board members, the degree to which the central bank is mandated to achieve price stability as its primary objective, and the extent to which the government is able to influence, or even veto, decisions of the central bank. This  http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14]  Central bank independence revisited  empirical relationship did not receive much attention before the early 1990s. [1] Historically, it needs to be viewed primarily against an understanding of how central banks in different institutional settings “managed to opt out of the great inflation after the break down of Bretton Woods”, to paraphrase a title used by Otmar Issing and co-authors in their account of German monetary policy in these years.

As I explained earlier, entrusting the ECB with the authority to make monetary policy decisions is not considered to give rise to legitimacy concerns because the ECB’s very clearly defined mandate in this area allows the public to hold it accountable for the performance of its tasks. In other words, the clear Treaty mandate of the ECB to maintain price stability, which has been quantified since the very beginning,[36] provides the citizens of the Union with a benchmark against which to judge whether this mandate has been fulfilled. Unlike the objective of the monetary policy, however, the objectives of the ECB’s supervisory tasks, as defined in the SSM Regulation, are diverse and multifaceted; and they are also not quantifiable. [37] For this reason, it is necessary for the tradeoffs and judgement calls concerning these objectives to be subject to a greater degree of scrutiny by democratically elected institutions, or sometimes to a degree of control by democratically elected institutions. In view of the multiple objectives of banking supervision that at times might even conflict with the ECB’s primary objective of maintaining price stability, it would not be justifiable to extend the independence under Article 130 of the Treaty to the ECB as supervisor. Let me emphasise at this point that I do not question the necessity for banking or financial supervisors to be operationally independent from undue political, commercial banking or other third party influences.