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 catalyst behind the framework of the three stages, described by Cottarelli and Giannini (1997), which influence the monetary institutions developing. First there is a period of incubation, second a crisis occurs which needs a reform and thirdly a consensus develops around a new framework. "The switch to Keynesian principles of "managed money" after World War II, the adoption of floating exchange rates and then monetary targets in the 1970s, and now the enthusiasm for central bank independence (CBI), all have owed much of their force to the power of academic ideas whose time has arrived" (Capie et al 1994).
To decide whether CBI should be full or partial one needs to look at empirical evidence and studies conducted showing both cases for and against full or partial independence.
