Advantages And Disadvantages Of Central Bank Independence

953 Words4 Pages
This essay will, firstly, give a definition of Central Bank Independence (CBI henceforth) and its role in the economy. Secondly, the majority of the essay will critically analyse the benefits (Part A1) and drawbacks (Part A2) of Central Bank Independence using various international literature – in Part A. It should be noted that this essay will not be able to compare developing nations’ literature  with regards to CBI  as most of the research is conducted on the OECD (Organisation for Economic Co-operation and Development) nations i.e. the developed nations of the world. Finally, it will also provide my own view on the recent debate surrounding the South African Reserve Bank’s (SARB) independence before concluding.

Part A1

There are
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Furthermore, countries can choose to have varying degrees of government involvement ranging from total governmental control of the central bank (completely dependent central bank) to total independence from government Polillo & Guillén, 2005:1767)

According to Grilli, Tabellini and Masciandaro (1991), central bank independence should be divided into “political independence” and “economic independence”(Alesina & Summers, 1993:153). Political independence is defined essentially as in Bade and Parkin (1982), as the ability of the central bank to select its policy objectives without influence from the government. This is based on whether or not the governor and the board are chosen by the government of the country, how long they will be appointed for, whether or not the government has members who sit on the central bank’s board, whether or not the government has to approve of monetary policy decisions and whether the inflation-targeting (so that the prices remain relatively stable) is an expressed and conspicuous part of the laws of the central bank (Alesina & Summers, 1993:153). Economic independence on the other hand could be defined as the capacity to use tools of monetary policy without constraints (Alesina & Summers, 1993:153).The most common restriction enforced upon monetary policy decisions of the central bank is the degree to which the central bank has to finance the government’s budget deficit i.e. the government’s
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