Monetary Policy Of A Central Bank

1246 WordsNov 10, 20155 Pages
Several authors including Bade and Park (1982), Alesina (1988,1989), and Grilli, Masciandaro and Tabellini (1991) found that more central banks are independent it would result in lower level of inflation. As Rogoff (1985) notes, dynamic inconsistency theories of inflation of the type developed in Kydland and Prescott (1977) and Barro and Gordon (1983) make it reasonable that more independent central banks will reduce the rate of inflation as delegating monetary policy to an agent whose preferences are more inflation averse than the societies preferences would serve as a commitment that allows sustaining a lower level of inflation. Insulating monetary policy from the political process helps enforce the low inflation equilibrium. Without…show more content…
Fed has been designed in such a way that it is separate from different kind of branches of government as it is a self-financed institution. The tenure of the seven board of directors span almost double than presidential and congressional term as it last for 14 years which actually promotes consistency and helps in carrying out the functions in a smooth manner. It was made clear in Maastricht treaty that ECB would be independent from any political pressures and it was made sure that enough powers are given to them that they can easily sustain any kind of pressure and can maintain their image of being independent. That 's why ECB activities and operations are kept separate from the interest of the Euro area. ECB has its own budget and it is paid by the national banks of the Euro area. The members of the executive members are given powers in order to minimize political influence, this is done by giving them long tenures to serve and they cannot be reappointed on that position which helps them to focus on implementing their policies with full force. ECB has all the powers and tools to carry out its monetary policy effectively and is given a free hand in deciding when to use different types of tools to stimulate its functions. . Bank of Japan revised its laws in order to also go towards greater independence, the new law aims to give BoJ autonomy regarding currency and monetary control. In order to establish this, the members of policy makers can be
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