CHAPTER 15 Central Banks and the Bank of Canada 401 ment further that policy is always performed better by elite groups like the Bank of Canada, we end up with such conclusions as the Canada Revenue Agency should set tax policies with no oversight from the government Would you advocate this degree of independence for the Canada Revenue Agency? The public holds government responsible for the economic well-being of the country, yet it lacks control over the government agency that may well be the most important factor in determining the health of the economy In addition, to achieve a cohesive program that will promote economic stability, monetary policy must be coordinated with fiscal policy (management of government spending and taxation) Only by placing monetary policy under the control of the politicians who also control fiscal policy can these two policies be prevented from working at cross-purposes There is no consensus on whether Bank of Canada independence is a good thing, although public support for independence of the central bank seems to have been growing in both Canada and abroad As you might expect, people who like the Bank s policies are more likely to support its independence, while those who dislike its policies advocate a less-independent Bank of Canada Global Central Bank Independence and Macroeconomic Performance We have seen that advocates of central bank independence believe that macroeconomic performance will be improved by making the central bank more independent Recent research seems to support this conjecture: when central banks are ranked from least independent to most independent, inflation performance is found to be the best for countries with the most independent central banks.16 Although a more independent central bank appears to lead to a lower inflation rate, this is not achieved at the expense of poorer real economic performance Countries with independent central banks are no more likely to have high unemployment or greater output fluctuations than countries with less-independent central banks S U M M A RY The Bank of Canada was created by an act of Parliament in 1934 and began operations on March 11, 1935 Initially it was privately owned but became a Crown corporation in 1938 The overall responsibility for the operation of the Bank of Canada rests with a Board of Directors, consisting of the governor, the senior deputy governor, the deputy minister of finance, and twelve outside directors The Bank s governor (currently Mark Carney) is the chief executive officer and chairman of the Board of Directors Although on paper the Bank of Canada is an arm of the government, in practice the Bank has more independence than the Bank of Canada Act suggests 16 The Bank of Canada is more independent than most agencies of the Canadian government, but it is still subject to political pressures The theory of bureaucratic behaviour indicates that one factor driving the Bank s behaviour is its attempt to increase its power and prestige This view explains many of the Bank s actions, although the agency may also try to act in the public interest The case for an independent Bank of Canada rests on the view that curtailing the Bank s independence and subjecting it to more political pressures would impart an inflationary bias to monetary policy An independent Bank of Canada can afford to take the long view and not respond to short-run problems that will result Alberto Alesina and Lawrence H Summers, Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence, Journal of Money, Credit and Banking 25 (1993): 151 162 However, Adam Posen, Central Bank Independence and Disinflationary Credibility: A Missing Link, Oxford Economic Papers 50 (1998): 335 359, has cast some doubt on whether the causality runs from central bank independence to improved inflation performance