Arguments for and against an Independent Central Bank

1843 Words Dec 1st, 2003 8 Pages

The European Central Bank (ECB) is a part of the attempt at European Monetary Union (EMU) and is the single locus of the European System Central Banks (ESCB), which has been formed from the voluntary union of national central banks, and the ECB itself. The National banks, like the Bundesbank, have however not been abolished. They merely become operating arms of the ECB. The ECB assumes responsibility for EU monetary policies, but it is the Council of Ministers and the not the ECB which is empowered to conclude agreements on the exchange rate systems in relation to non-EU currencies and to change the central rates for the single currency within the system. Therefore, for the exchange rate, it rests with the Council of
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Furthermore, to point out, long-term interest rates, which reflect inflationary expectations, did indeed fall in the UK after the Bank of England was given operational independence.

I have also observed that countries with independent central banks have lower inflation. This claim raises what economist call "a problem of causality". Cause and effect can be difficult to disentangle. Is it that countries with independent central banks have low inflation? Or is it that countries with low inflation have independent central banks? Or is it that there is something about these countries which creates both the independent central bank and the low inflation?

One might argue, that in the case of Germany, we have a country, which, twice in about 20 years, faced social collapse through hyper-inflation and therefore developed a very high anti-inflationary attitude. Through out society one manifestation of this anti-inflationary attitude might be low inflation. Another manifestation might be the Bundesbank.

I shall now present argument against independent central banks.

3.Arguments against Independent Central Banks

3.1Co-ordination of economic policy

This is a very old and probably also one of the most famous arguments, that monetary and fiscal policy would work best if they were working together. If fiscal and monetary policy are not co-ordinated, if they are not working together as part of some overall strategy, then economic policy as a whole will not be as

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