Is the Era of Central Bank Independence Drawing to a Close?

According to the research of Alex Cukierman, the inflation and actual independence are negatively correlated in both developed and developing countries. The central banks have embraced their roles for financial stability and the use of macroprudential policies, where the corporation of other public authorities is needed, which creates pressure on them to be less independent.

Due to their choices during the global financial crisis, the central banks are under the scrutiny and their increased rate of voice raised against them on their decisions in various matters, which is getting much media coverage.

Everyone more or less agrees that there will be challenges to the bank’s independence, but they are nearly half split on the opinion whether they would be strong enough or last long enough to make a difference.

Experts point out that the central banks should retain their independence, as the political forces would focus more on handling the unemployment to gain the people’s appreciation, leading to high inflation, and eventual detriment to the country’s economy. If the government has the power to decide on the monetary as well as fiscal policies of the country, they would make sure to target expansion of these policies to pump money into the market and make the people happy and win the next election. But this would lead to hyperinflation, which is not good for the country. So, it is a better to have two parties so that they can counteract if the other party mis-acts.

But if the central banks get involved in more than one objective, trade-offs may start to appear and some discussion of the social welfare function may be needed. So their should be measure put in to make sure that neither the government nor the central bank can put in policies that can negatively affect the country’s economy, and have countermeasures for the same.

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