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Over the past decade, there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance. In...

      

Over the past decade, there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance. In respect to this statement discuss any 4 types of independence of a typical central bank.

  

Answers


Zainabu
1. Legal independence

The independence of the central bank is enshrined in law. This type of independence is limited in a democratic state; in almost all cases the central bank is accountable at some level to government officials, either through a government minister or directly to a legislature. Even describing degrees of legal independence has proven to be a challenge since legislation typically provides only a framework within which the government and the central bank work out their relationship.

2. Goal independence

The central bank has the right to set its own policy goals, whether inflation targeting, management of the supply of money, or maintaining a fixed exchange rate. While this type of independence is more common, many central banks prefer to announce their policy goals in partnership with the appropriate government departments. This increases the transparency of the policy setting process and thereby increases the credibility of the goals chosen by providing assurance that they will not be changed without notice. In addition, the setting of common goals by the central bank and the government assists to avoid situations where monetary and fiscal policy are in conflict; a policy combination that is clearly sub-optimal.

3. Operational independence

The central bank has the independence to establish the best way of achieving its policy goals, including the types of instruments used and the timing of their use. This is the most common form of central bank independence. The granting of independence to the Bank of England in 1997 was, in fact, the granting of operational independence; the inflation target continued to be announced in the Chancellor's annual budget speech to Parliament.

4. Management independence

The central bank has the authority to run its own operations such as appointing staff, setting budgets, and so on without excessive involvement of the government. The other forms of independence are not possible unless the central bank has a significant degree of management independence. One of the most common statistical indicators used in the literature as a proxy for central bank independence is the "turn-over-rate" of central bank governors. If a government is in the habit of appointing and replacing the governor frequently, it clearly has the capacity to micro-manage the central bank through its choice of governors.



Zainabdawa answered the question on July 27, 2018 at 14:27


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