Question

2. How independent is the Central Bank? What factors contribute to and what factors work against independence? Discuss arguments for and against the independence of the Central Bank.

Answer 1

The independence of Central Bank is always a subject of debate in different countries. Central banks are not completely independent but they are also not completely dependent.

Central banks operates under the Federal government in some countries and are accountable to to respective legislatures.

Different factors which can contribute to the independence of Central Bank such as transparency in formulation of monetary policy, better management of treasuries books in times of crisis.

Factors which can work against the independence of Central banks like the intervention from central government, because it has to make central bank Formulate such policies which are people centric and helps in fetching votes. It could be seen through an example when the central government makes Central banks cut interest rates and formulate liberalised policy at times of election to woo public and that can help in fetching votes.

An independent central bank is very important for stable monetary policy which helps in long term sustainability of sound economy. It is not always important to to privatise profits and socialize losses as it has done in past few years by bailing out public companies. Central bank should not be a tool of flattering public , it should rather be a tool of formulation of sound economic monetary policy.