Central Banking Recent Trends and Debates

Topics: Inflation, Central bank, Bank Pages: 6 (2669 words) Published: October 15, 2014
Central Banking: Recent Trends and Debates

Central Bank Independence
The term autonomy, or independence, in context of Central Banks, refers to how freely the monetary policy makers can conduct policies with little or no interference from the government. Also referred to as the “autonomy” of Central Banks, the definition of independence considers two important aspects. They are political independence and economic independence, However, nowadays these aspects have more popular names: “Goal independence”, “Target independence” and “Instrumental in dependence”.

1) Goal Independence: Allows the Central Bank to decide its own monetary goal and/or exchange rate system, exclusive to the direct influence of the politicians. In the case of a floating exchange rate system, the central bank solely concentrates on the monetary policy. Some common monetary goals are maintaining price stability, controlling money supply or increasing real growth in the economy 2) Target Independence: When the central bank is goal dependent, i.e. the state decides the macroeconomic objectives, it lets the central bank set the target value to the goal and to come up with the policy instruments with which it will achieve the target. For instance, if the state wants to keep the inflation rate at a low level of 2 percent, it will probably adopt a contractual monetary policy where the interest rate is set at a very high level. 3) Instrumental Independence: This is probably the least independent dimension among the three that we have been discussing. The government “consults” the central bank and sets the monetary target. The Central Bank is said to be instrumentally independent as it is free to choose the policy tools to attain a macroeconomic goal. Besides that, it is both goal dependent and target dependent on the government. The instruments applied by the bank are: Open-market operations, discount lending and reserve require.

The Legal Measure: According to Cukierman, Webb, and Neyapti (1991), the legal measure of independence of a central bank is based on four criteria. I. Appointment of chief executive: A bank is viewed to be more independent if the chief executive is appointed by the central bank and not the prime minister or the finance minister, and has a long term of office. II. Government involvement in policy decisions: the independence is greater as the policy decisions are made with less and less participation of the government. III. Goal of monetary policy: When price stability is given the maximum priority, a bank is said to have a high level of independence. IV. Government borrowing from central bank: Finally, the level of independence is greater if more restrictions are placed on the ability of the government to borrow from the central bank.

Developed Country vs. Developing Country
A developing country normally has comparatively low level of affluence and more unemployment rate. In developing countries, there is low per capita income, poverty, less education level and low capital formation. Such countries are fighting to get these things, but might not have reached them. These countries are usually suffered from war, disease, poverty, natural disasters, etc.

The developed/advanced countries have developed economies. They have technological improvements, excellent roads, a steady government etc. This level of economic development usually translates into a High GDP per capita (average income), Good education, Good health-care, and Death &birth rate are almost the same.

Developed Country vs. Developing Country

Roles played by Central Bank in developing countries
In the developing countries, the central bank has to play a much wider role. Besides performing the traditional functions, the central bank has to undertake responsibility of economic growth with stability in these economies. Moreover, since the developing...
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