Although the conservative central banker resolves the trade-off between inflation variance and employment variance by opting for more stable inflation, the costs of keeping inflation stable are lower thanks to the reputation earned by the central banker over many years. The second line of theory attempting to prevent inflationary bias was the principalagent approach developed, for example, by Carl Walsh in 1995. In this framework, the government (the principal) contracts the central bank (the agent) to deliver the required rate of inflation and penalises it if it fails. This was the route followed, for example, by New Zealand, which in 1990 became the first country in the world to adopt inflation targeting, followed in 1998 by the Bank of England. These two theoretical approaches define and determine the field for the two main forms of 1/7  BIS central bankers' speeches  central bank independence: goal independence and instrument independence. While Rogoff’s conservative banker can define her own objective function almost without restriction because she enjoys both goal and instrument dependence, a central banker (agent) working for the government (principal), usually represented by the minister of finance, has no freedom to choose the goal and is only free to decide how to achieve the goal set by someone else. Empirical findings The theoretical research was accompanied by empirical studies attempting to prove a causal link between central bank independence and the rate of inflation.
Conversely, the second worry is that broadening central banks’ responsibilities could undermine their core monetary policy function. In the pursuit of its financial stability mandate, a central bank could be drawn into politically contentious areas such as housing policy and income inequality. Greater coordination with fiscal policy could also cause the central bank to be pressured into monetary financing or even fiscal dominance. On a general level, combining monetary policy and financial stability may bring back the time inconsistency problem, which is exactly why central banks were granted independence in the first place. The post-GFC situation of central banks can be summed up as follows. The fiscal consolidation and only partial structural reforms undertaken by many governments made central banks more or less the only game in town. And as economies weren’t running satisfactorily, this game wasn’t cast in a good light. The long period of exceptionally low nominal and real interest rates spurred an intensive examination of the possible consequences. These include growing indebtedness, overvalued asset prices, underestimated risks, misallocated loans and resources, and lower productivity. However, it will take a long time to properly assess the impacts of other unconventional instruments. To quote Charles Goodhart: “Central bank independence was nice while it lasted, but it owed a great deal to the supporting conditions that enabled it to achieve such great success in its early years. Rest in peace.”  The rebirth of the fiscal-monetary mix?