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...
... middle of paper ...
...bal public goods: managing globalization. Oxford University Press, 2003.
Loungani, Prakash, and Nathan Sheets. "Central bank independence, inflation, and growth in transition economies." Journal of Money, Credit, and Banking (1997): 381-399.
Love, James, and Tim Hubbard. "Paying for public goods." Code: Collaborative ownership and the digital economy (2005): 207-229.
Marwell, Gerald, and Ruth E Ames. "Economists free ride, does anyone else?: Experiments on the provision of public goods, IV." Journal of Public Economics 15.3 (1981): 295-310.
McCallum, Bennett T. "Crucial issues concerning central bank independence." Journal of Monetary Economics 39.1 (1997): 99-112.
Xingzhong, LI Daokui David YIN. "The International Monetary System in the Era of Post-Financial Crisis: What Policy Options Does China Have?[J]." Journal of Financial Research 2 (2010): 005
Need Writing Help?
Get feedback on grammar, clarity, concision and logic instantly.Check your paper »
- 4.2 Central Bank Transparency Having long been seen as a necessary complement of central bank independence, another institutional factor, central bank transparency, is considered as an important feature to enable accountability in monetary policymaking and safeguard the democratic legitimacy of independent central banks. Apart from reinforcing the independence of a central bank, a greater level of central bank transparency, as the consensus among economists maintains, would improve economic performance in a country.... [tags: Central bank, Monetary policy, Inflation]
1547 words (4.4 pages)
- Abstract Do economic and legal institutions evolve to facilitate efficient coordinated activity despite the self-interested preferences of individuals. I argue that institutions seek the option to maximize public benefit from the perspective of independent central banks and decision-making of monetary policies. I discuss about the role of individual preference during the decision-making process of monetary policies. 1. Introduction In his 1962 essay “Should There Be An Independent Central Bank?” Milton Friedman discussed three alternative institutional arrangements through which governments can exercise responsibility for monetary policy: a commodity standard, an independent central bank,... [tags: Central bank, Monetary policy, Inflation]
1383 words (4 pages)
- As we are moving to the end of the course, we want to present you with the Federal Reserve System (Fed), which is the central bank of the USA. We are going to explore the roles of Fed in regularizing the economy, its function, and also the tools used in doing that. We will learn how central banks regulate the banking system and how they manage money supply in economies. We will also be presented to the financial crises lessons we can be able to understand the importance of the regulatory system; and then, we answering questions such as: 1.... [tags: Monetary policy, Central bank]
740 words (2.1 pages)
- Introduction The European Union is an economic and political grouping of 28 member-states in Europe that forms a common market. The market has a population of around 509 million people with a DGP of $16.69 trillion (2012) accounting for 23% of global GDP and 20% of the world's imports and exports (EU, 2013). The union has its origins in 1958 through its predecessor European Economic Community which had six members (EU 2014). The current name was adapted in 1993 and ever since membership has increased to include countries that were previously viewed as non-European such as Turkey.... [tags: common currency, common market]
1091 words (3.1 pages)
- In conjunction with their respective governments, central banks have been manipulating economies for decades. Central bankers have sought to control interest rates, inflation and credit through their policies. Their efforts have impacted the stock market, job creation, home construction and many more aspects of the economy. However, in recent years, central bankers have manipulated themselves into a corner and become trapped in the mess that they made. Why Are Central Banks Trapped in Their Own Mess.... [tags: Central bank, Monetary policy]
891 words (2.5 pages)
- While in general the European Central Bank was in ‘wait and see mode,” Germany needed to take action. Germany is an interesting economic case because internally the economy has shown strong domestic demand and low unemployment but because of the German ties to the European economic crisis these are offsetting. So while everything points to a relatively strong German economy there is still the issue of the 2014 inflation rate drop to 2.9%. The German economy grew some 1.5 percent in 2014 and continued to show strong growth indicators.... [tags: Inflation, Monetary policy, Central bank, Money]
920 words (2.6 pages)
- The prime ministers along with European Central Bank (ECB) and European Union (EU) are faced with a crippling economy. These entities have to agree on a bailout plan that will not only stabilize the economy but not break any guidelines of each establishment. Due to the overwhelming need of funds all parties have to agree on a specific amount that will be given to handle this manner. While all entities are capable of providing the funds there has been some resistance as others may interpret assistance from the ECB may send message that assistance will be provided no matter what the circumstance.... [tags: Central bank, Monetary policy]
1483 words (4.2 pages)
- The central bank’s balance sheet in the small open economy: the fiscal theory and central banks’ solvency The central bank’s balance sheet has been in economists’ attentions for a long time. Since the late 1990s, researchers have used the government and the central bank’s balance sheet to develop the fiscal theory of the price level explaining how the central bank chooses the price level (Leeper 1991; Sims 1994; Cochrane 1996; Loyo 1999; Cochrane 2005). Recently, this attention in the central bank’s balance sheet has been magnified in academic researches since the Quantitative Easing initiated by some countries after the financial crisis.... [tags: Monetary policy, Central bank, Inflation]
782 words (2.2 pages)
- The Independence of the Chinese Central Bank 1. Introduction How much degree of the independence the country’s central bank has. It concerns whether the country’s monetary policy is reasonable and scientific; whether the stability of currency value is ensured; whether the country’s economy could have a healthy development. The problem of the central bank’s independence is one of the most important problems of a country’s finance and legal development. 1.1 Definition The central bank is a special financial institution, which has the power (given by the government)of making and carrying out monetary policy, giving the national economy control and management.... [tags: Monetary Policy System Fed China]
1920 words (5.5 pages)
- AFEAEM734 Macroeconomics for Banking and Finance Coursework Explain, with reference to one real world example, the role played by central bank independence in improving inflation performance. Introduction The aim of the assignment is to evaluate and analyse the role played by central bank independence, henceforth CBI, in improving or lowering inflation. There have been countless investigations into this and the general consensus points out that the relationship between CBI and inflation is negatively correlated, meaning that the more the degree of independence a central bank has the lower the inflation.... [tags: Inflation performance]
3275 words (9.4 pages)