Central bank independence revisited  Central bank independence revisited Keynote address by Yves Mersch, Member of the Executive Board of the ECB, at the “Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the United States”, Frankfurt am Main, 30 March 2017 Good morning, ladies and gentlemen. It is a pleasure to speak to you today on the subject of central bank independence. Independence has been granted to central banks in order to shield them from short-term political influence when fulfilling their mandate of ensuring price stability. It is largely undisputed that an independent central bank with a clearly defined mandate is better able to keep inflation lower and more stable. In the post financial crisis era, however, central banks in many countries have been entrusted with powers and responsibilities going beyond their traditional monetary policy mandates. Central banks have, for example, started acting in the areas of macro- and microprudential supervision and crisis management. Also, while remaining within their monetary policy mandate, some central banks adopted unconventional monetary policy measures. Critical voices claim that central banks have been over-stretching their mandates, blurring or even crossing the line into fiscal and economic policy. Central banks are accused of influencing the distribution of income and wealth and subsidising the financial sector at the expense of society as a whole – policy areas which traditionally require more democratic legitimacy and control. This has re-opened the debate surrounding the legitimacy, and the precise scope, of central bank independence.

The so-called “U6 measure” captures unemployment, underemployment (meaning workers who would like to work more hours) and marginal attachment, namely those workers that are not competing very actively in the labour market, for example because they are not available to start a new job at short notice. This measure currently covers just below 18% of the labour force and is thus considerably higher than the unemployment rate.4 We are experiencing a solid and broad-based economic expansion that is contributing to a narrowing of the output and unemployment gaps. But there still appears to be a disconnect between growth and inflation. As slack in the economy continues to be absorbed, reflationary forces will gradually build up and the traditional Phillips curve relationship between inflation and the business cycle should eventually reassert itself. That being said, current estimates of the slope of the Phillips curve still appear to be flatter than in previous times, which could be interpreted as an indication that the relationship between economic slack and inflation has weakened. A mismeasurement of slack (because of structural changes in the labour market) or an unstable relationship between slack and inflation over time could be among the reasons. At the same time, this effect could also result from discrete parallel shifts in the Phillips curve. Such parallel shifts can arise due to temporary changes in wage and inflation mark-ups, or – more concerning from a central bank’s perspective – the incipient dislodging of inflation expectations.