Is full (i.e. instrument and goal) central bank independence
Over the last decade 34 industrial and developing countries central banks have been released from the clutches as puppets from the government and have been given (or increased) independence. As apposed to only three such changes during the 1980s (Maxfield 1997). The degree of independence is the topic of this assignment, which is should a central bank be allowed to have both political and economic power or just economic power? Full independence means that a central bank has both economic (instrument) and political (goal) power. For example the Bundesbank in Germany has full independence. Instrument independence means a central bank has only have economic power (e.g. interest rate control). For example the Bank of England has partial independence, in that it has instrument control but not objective power. Grilli et al (1991) define political independence as ‘the ability of the central bank to select its objectives without influence from the government’. The factors affecting these objectives are explained later. Grilli et al (1991) also define economic independence as ‘the ability to use instruments of monetary policy without restrictions’. The factors affecting the instruments are explained later. Ideas seem to be the cata
As popular as the view is for full independence CBI has its critics, one objection to full CBI is the potential for complete lack of accountability. CBI reduces the credibility problem at the cost of placing monetary policy in the hands of unelected officials (De Hann 1999). Accountability, as defined by the Oxford English Dictionary means ‘ obliged to give a reckoning or explanation for one’s actions; responsible’. It also defines responsible as ‘legally obliged to carry out a duty; liable to be blamed for loss or failure’. Levy (1995) argues that democracy requires that CBI be limited so that the makers of monetary policy cannot stray far from the will of the people as embodied in their duly elected representatives. The delegation of power to an unelected authority (central bank) might be interpreted as a dilution of democracy: an empowered, but unaccountable, central bank gives rise to a democratic deficit (King et al (1996). This opens the problem of a moral hazard for an unaccountable central bank. However, one should not conclude that delegation of power to unelected officials in itself lacks democratic legitimation. Parliament represents the views of the electorate; therefore, the government should have instruments to influence the central bank, as it otherwise cannot be held responsible for monetary policy (e.g. the possibility to override policy decisions of the central bank). De Hann (1999) believes that the ‘politicians should decide the objectives of the monetary policy, it is questionable whether the objectives of the monetary policy should be left in the hands of an independent institution, which is not subject to responsibility’.
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Approximate Word count = 4086
Approximate Pages = 16 (250 words per page double spaced)
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