##isit the motivation for central bank independence. i will then ask whether those justifications are still relevant today. or is central bank independence a solution to yesterday's problems? i will then discuss why central bank independence is under more threat today and ask whether modifications to the model of central bank independence are required. three foundations of central bank independence first, i would like to revisit the three foundations of the arguments supporting our conclusions on goal dependence and instrument independence. the first foundation was the performance of the bundesbank. we questioned how effective the bundesbank had been, in the sense that recessions were at least as costly ( in terms of lost output ) in germany than they had been in other countries with less independence. that is, the sacrifice ratio in germany was not lower, which would have been expected if there had been a material credibility benefit from the bundesbank's independence. we cautioned against the cult of central bank independence, that is, the need to avoid excessive concentration on inflation avoidance. hence the conclusion that a central bank should have goal dependence. second, there was the academic literature. stan and i noted that much of the academic literature focused on rules versus discretion in the context of dynamic inconsistency. [ 4 ] dynamic inconsistency doesn't have any particular implication for central bank independence. a rules - based monetary policy can be implemented mechanically by an agency with neither goal nor instrument independence. the argument won out in favour of discretion ; if not in all of the theoretical literature then absolutely in practice. but both in practice and to a large extent in theory, the solution was in the form of ‘ constrained discretion ’. [ 5 ] the constraint on discretion is the goal for the central bank set by the government. the central bank has complete discretion as to how best to achieve that goal. given discretion, what then is the best institutional framework? stan and i also noted that ken rogoff's conservative central banker could be too inflation averse to be socially optimal. [ 6 ] the optimal degree of central bank independence was ‘ chosen by trading off the reduction in mean inflation secured by conservatism against the less than optimal trade - off between inflation and output variability produced by that same conservatism ’. [ 7 ] carl walsh took up this point in designing a socially optimal incentive contract for central bank governors, and the new zealanders went a fair way towards operationalising it. third there was the empirical evidence of alex

rate of productivity growth and a greater degree of acceleration in productivity than seen in the us over the same period. ) it is no coincidence that profits did relatively well through most of that period, and that this was able to co - exist with rising real wages. during the past couple of years, the rate of expansion in productivity first slowed markedly, then sped up again. this is a standard cyclical pattern, in which employment moves in response to economic activity, but with a lag. hence employment lags the slowing in activity, and measured productivity slows or even declines. the reverse happens when growth picks up, as it did during the first three quarters of 2001. the extensive program of liberalisation of the economy during the past couple of decades was a major driving force behind the improvement in trend productivity growth. as a side note, we in australia have not tended to allow much role for " new economy " developments, such as the adoption of information technology, though some research does suggest that this may have played a greater role than conventional wisdom has allowed. but the bigger question is the future. leaving aside recent cyclical ups and downs, will the strong trend productivity growth of the 1990s continue into the next ten years? on this there are, i suppose, optimists and pessimists. optimists would argue that the faster productivity growth we have seen in the past decade represents an accelerated process of " catch up " to the leading edge levels of productivity we see globally, usually in the us economy. moreover, they accept that there is still some gap between productivity levels in australia and those of the world frontier in at least some sectors. hence the catch up is not complete, and a process of good productivity growth can continue for some time yet. pessimists tend to point out that this depends on the right policies. they worry that if the process of liberalising markets does not continue, or is even reversed, productivity performance will suffer. they voice the concern that it is getting harder to build support for liberalising ideas. both of these views have some merit, and it is possible to have an optimistic outlook, but equally to see the importance of sustaining the liberal market arrangements which already exist, and of being disposed towards further sensible reforms that may be possible over time. good policies will be important, of course – that goes without saying. but policies can only establish pre - conditions conducive to enhanced productivity. the outcomes will depend quite heavily on you, the