Question

Does Central Bank Independence Improve the Efficiency of Monetary Policy? Discuss with examples.

Answer 1

When central bank works independently, then it is more focussed upon its key policy target such as target inflation rate and or target interest rate in the economy to achieve its short and long run objectives. It is done, because central bank's policies are not affected by the undue political pressure and government does not influence the monetary policy. It makes monetary policy to achieve objectives and its efficiency level is higher. It can be understood, by the example of independence given to the Federal Reserve in the USA. Federal reserve has governors who are appointed for 14 years and this terms is more than the cumulative 3 terms of the presidents in the USA. It causes Fed to design and implement monetary policy that is most important to bring stability and growth in the economy. It brings more success and efficiency to the monetary policy. It can be observed with how Fed helped US economy recover from 2008 crisis and proactive policy initiative taken by Fed in the wake of COVID-19 pandemic. In contrast to it, Central bank in China is making monetary policy that is causing Yuan to be undervalued and it is under the pressure of Chinese government. It may achieve success in short term, but it eliminates the significance of monetary policy in China and its significance. So, it creates negative influence upon the prosperity of people in china in long run.

So, it is significant for the central bank to work independently to make efficient monetary policy.