##agmatic case for independence is valid regardless of the economic context of the country at issue. it is compelling in countries that face the challenge of ending a period of high inflation, but also in countries that have achieved a sustained period of low inflation. it ’ s important for mature economies and for emerging markets. it is important regardless of the nature of the monetary policy and exchange rate regime, and the nature of the mandate given the central bank. the choice of regime – adoption of an inflation targeting framework, or the use of an exchange rate target as a nominal anchor, for example – may help improve credibility even for central banks that are not independent. but credibility is likely to be higher across different regimes where the central bank is truly independent. it will be higher, for example, for independent inflation targeting central banks, than for inflation targeters that are not independent. to say that the benefits of independence are essentially universal, however, doesn ’ t mean they are equivalent in magnitude across different contexts. where credibility is most vulnerable and the memory of default and high inflation more recent, the benefits of institutional independence for the central bank are likely to be substantial. the academic literature provides reasonably strong empirical support for these arguments in favor of central bank independence. independent central banks do, in fact, do a better job of achieving price stability. the greater the independence of the central bank, the lower the average level of inflation and the less volatile the inflation rate. these gains in inflation performance by independent central banks were not achieved at the expense of greater stability in output. or to put in differently, lower inflation did not bring about higher output volatility. credibility, where underpinned by independence, should reduce uncertainty, reduce the probability of a sustained rise in inflation, and therefore reduce output volatility. central bank independence is a necessary condition for effective monetary policy, but it ’ s not a sufficient condition. also important are the nature of the mandate given the central bank and the combination of flexibility and constraints that the mandate provides, the quality of the decisions made by the central bank over time in pursuing that mandate, and how the central bank communicates about policy. the experience of the federal reserve system in the united states provides an interesting prism through which to look at these dimensions of central banking. since the establishment of the central bank of the united states in 1914, we ’ ve had remarkable stability in the basic structure of the central bank, but of course u. s. inflation performance varied significantly over these nine decades

. publically available positioning data in the futures market does indicate that investors who take positions for purposes other than hedging had accumulated a large base of short positions in shorter - term interest rate futures contracts over the preceding months, and that that aggregate position unwound sharply in the weeks around october 15. yet these factors are less convincing as explanations of the round - trip in yields witnessed more than an hour after the data release. activity in this event window also appears unconnected to any other piece of incoming information. as a result, many market participants and members of the official sector have questioned whether recent changes in the structure of the treasury market can help explain the move, and some have focused on the potential role of electronic and automated trading. clearly automated trading likely played an important role in the speed of transmission of price movements from the treasury market to other markets, since such technology allows investors to quickly identify and execute trades that are predicated on tight linkages between different markets. at the same time, some have suggested that firms engaging in automated trading may have “ unplugged ” their systems or carried out strategies that prompted or exacerbated the volatility. to be sure, the response of firms relying heavily on automated trading strategies to market volatility may be different than that of non - automated participants, given the ability of automated systems to rapidly adjust their risk exposure in response to evolving order book and market price dynamics. however, a wholesale retreat on october 15 is inconsistent with the extraordinarily high trading volumes observed throughout the day, and the continuous nature of trading that occurred even during the most volatile periods. indeed, some past periods of very sharp changes in financial asset prices have been characterized by prices “ gapping ” from one point to another, with little trading in between. but this appears not to have been the case on october 15. even so, it is possible that changes in the participation or behavior of firms employing automated strategies – including broker - dealers and proprietary trading firms – had an effect on market liquidity and price movements that day, even if there was no wholesale disengagement. others have suggested that the event window on october 15 is a byproduct of regulatory changes that have reduced traditional dealers ’ ability to serve as shock absorbers during periods of volatility by accommodating large net order flows. in particular, some market participants argue that recent regulatory changes have increased the cost that dealers face when expanding their balance sheets, leaving them