Legitimacy Challenges to Central Banks: Sketching a Way Forward

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Delegation to independent agencies (IAs) can reap real benefits for policy making. In the case of monetary policy, it shores up the credibility of the central bank. However, it is generally accepted that the discretion of IAs needs to be constrained to ensure their legitimacy.

This paper aims to deepen our understanding of the link between delegation and legitimacy by considering the following challenge to the legitimacy of central banks: Their legitimacy is under threat due to the unintended consequences their actions have on inequalities in income and wealth on the one hand, and on the environment on the other. To frame these challenges, the paper builds on the distinction between input versus output legitimacy. The paper shows that this distinction highlights an important difference between the two policy contexts. It subsequently presents and analyses different strategies of institutional design to enhance the legitimacy of central banks vis-à-vis the two challenges.