Please explain why the independence of central banks is important. And please provide a long/in depth...

Please explain why the independence of central banks is important. And please provide a long/in depth answer with supportive facts. Also, please (TYPE) everything.

Expert Solution

Central bank has been mandated to stabilize price level and achieve objective of full employment. These are two mandates of central bank. Central banks are usually independent. these are not controlled by the government.

Control of banks by the government might lead to certain undesirable outcomes. Government focuses on winning election and it might pressurize central bank to focus on the short run objectives, instead of long run. it will compromise price stability and over the long run, economic growth would be badly affected. Further, Public representatives in democratic government are not experts in financial matters, they might direct central bank incorrectly with short run motives.

Hence, in order to maintain price stability and economic growth, central banks must be independent else result could be same as we have seen in many African and Latin American countries where government exerted pressures on central banks and caused hyper inflation.

Rahul Sunny answered 1 year ago

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