And third, how to compensate for the democratic deficit of technocratic monetary policy decision-making. Concerning the first issue, empirical research has found out that greater central bank independence is on average associated with lower inflation, but not with higher volatility. This “free lunch” was a bit surprising in the light of the “conservative central banker theory”. It reflects the fact that the actual institutional and policy design has evolved over time to guarantee that the mandate to achieve low inflation is not interpreted rigidly. In fact, most central bankers pay attention to real economic developments in their policies. In the last decade, this fact has been formally and institutionally reflected in the “flexible” inflation-targeting regime. This regime is often described as “constrained discretion”, meaning that it aims at making the monetary policy-making constrained by understandable procedures and at the same time flexible in responding to unforeseen shocks. As far as the democratic deficit is concerned, this issue has been addressed by moving to greater transparency and accountability of central banks. The burden of proof in central banks’ communication has shifted over the last two decades. At present, it is necessary to give convincing arguments if one thinks that the central bank should not give out some information, rather than to argue why something should be revealed. This has been a significant shift in the central banks’ mentality. Regarding the issue of communication and co-operation between the central bank and government, no universal solution has been found so far.

There are many institutional arrangements, ranging from formal contracts between the government and central bank to non-formalised consultations between the two bodies. The efficiency of such arrangements, however, depends in most cases on their actual implementation. Now I come to the fiscal sphere. A trend towards rule-based policy can be observed here as well, albeit with some time lag and in a different form compared with monetary policy. The difference originates mainly from the fact that fiscal policy is by definition a political issue with strong redistribution aspects, which cannot easily be mandated out of direct democratic control. The independence solution is thus not readily available here, even though there have been such suggestions in the economic literature. This contributes to the fact that no single elegant model has yet been found in practice. The existing rules usually take the form of self-imposed constraints, such as legal constraints (balanced-budget acts in some countries) or international treaties (S&G Pact). Apart from this difference, though, the aim to implement rules stems from the same reasons and faces similar challenges as in monetary policy. The idea that policy should be designed in a way that does not put short-term political gains above the longer-term interests of society, that takes into account its impact on private expectations, and that is transparent to the public, is common to the monetary and  fiscal spheres. Similarly, the rules must also address the issue of their costs in terms of macroeconomic stabilisation and finding a proper policy mix.