Give theoretical reasons for the central banks to become ind

The main aim for independence is that it reduces the political pressure from the political party in office and brings transparency in policies. Politicians are motivated by short sighted need to win re-elections. They’ve made promises in their policies to their voters which they need to fulfil to be re-elected. For instance, a political party may have promised to reduce the unemployment in the country and to do this they’ll probably have to use policies which give a speedy boost on the unemployment levels, as they’ve a limited amount of time to win the elections. They therefore use expansionary monetary policies to boost the economy, rather than supply side policies will have a lasting effect on the economy in the long run, as this takes time they don’t have. Monetary policy would be carried out through reducing the interest rates by the central bank, which would le

The central bank aims at overseeing the financial system. The supervision of the financial system is usually done in conjunction with other bodies, specifically set up for regulating distinct parts of the financial system. For instance they ensured that licences were needed for deposit takers in the UK and the central bank regulates a range of financial systems. For example there is a body formed to regulate the operations of monopolies in the UK.

There’s the problem of: how you can tell what independence is. How can you measure independence? How do you produce central bank independence indexes? There’s a difference between actual independence and independence in theory. A country may be said to have to be under a system of an independent central bank due to it being so under law of a country. However formally declared independent and actual independence are two different things. For example, the Japanese central bank is formally declared as independent but still controlled of their ministry of finance. This then makes empirical work which says independent central banks work better difficult to trust.

Under a central bank controlled by the treasury, it can be used to facilitate large budget deficits from the government, through the purchasing of treasury bonds. If the central bank is not independent from treasury control, they are more likely to give in to pressure by the government to facilitate debts.

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