Wharton Pension Research Council Working Papers

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Working Paper

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A narrative of central bank independence took root in the mid-20th century and flourished from the 1980s until the global financial crisis. In that narrative, a central bank is designed to protect the people from their own worst instincts. The populace will demand easy money and low interest rates, and a politically sensitive representative class will give it to them. Central banks are given political independence, such as it is, to resolve this time consistency problem by protecting the long-term value of the currency even against the short term demands of politics. As with so much else, two of the defining events of the 21st century—the global financial crisis of 2008 and the 2016 election—have changed this standard narrative. Today, the U.S. Federal Reserve and other central banks are more likely to face political pressures to raise interest rates rather than lower them. This chapter explores how this new political economy of central banking, in the face of long-term low interest rates, changes the posture of central banks against the rest of the polity. It discusses some history of political pressures against central banks in other climates and makes predictions about how the “new normal” of lower interest rates will challenge the Fed’s ability to stay above the political fray, despite its best intentions.


The published version of this Working Paper may be found in the 2018 publication: How Persistent Low Returns Will Shape Saving and Retirement.

Working Paper Number


Copyright/Permission Statement

All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2017 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.

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Date Posted: 13 February 2019