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The Pros and Cons of an Independent Central Bank

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1. INTRODUCTION

In 1962, Milton Friedman wrote the essay “Should There Be An Independent Central Bank?” Since then, half a century has passed. Nowadays, many countries in the world have their independent central banks. But the discussion about whether central banks should be independent does not end. This paper will try to 1) provide the arguments on both pros and cons whether central banks should be independent; 2) provides evidence about the relationship between central bank independence and inflation in developed countries, developing countries and transition countries.

2. THE PROS AND CONS ARGUMENT ON WHETHER CENTRAL BANKS SHOULD BE INDEPENDENT

The main reasons that central banks should be independent are following. First, if central banks are not independent, it is likely to result in inflation, because politicians in democratic societies are usually short-sighted when making monetary policies. They might put the election winning as the most important issue, which could lead to little attention to price stability such a long-term goal. In order to win an election, central banks controlled by governments are motivated to do anything which may help to decrease unemployment rate even it is possible to allow the genie of inflation out of the bottle. Alesina et al. (1989) believed that there might be a political industry cycle. That is to say, when the election is coming, government is incentives to implement expansionary policies to reduce unemployment and interest rates, but after the election, the adverse consequences of previous policies, such as high inflation and high interest rates, are likely to appear. Therefore, independent central banks are more likely to focus on long-term goals, fight against inflatio...

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