The Relationship Between Central Bank Autonomy And Employment

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A large body of academic research – both theoretical and empirical – reaches a consensus that the higher the degree of independence of a central bank, the lower is the average rate of inflation, and the smaller are the fluctuations in a country’s price level. Nevertheless, as regards the relationship between central bank autonomy and employment, the findings are pretty unambiguous. Some authors believe independent central banks bring side effects, as illustrated by Philips curve, in terms of lower and more volatile economic growth rates, while others suggest independent central banks actually have neutral, or even favorable impacts on economic growth by providing more predictable and stable monetary policies.

The aim of this essay is to review the literatures about this topic, and to give a brief answer to those two questions. Section 1 discusses what is meant by ‘independence’ in three different dimensions. We then, in Section 2 review the main strands of theoretical work which have argued that ‘independence’ is desirable for monetary policymaker in keeping price stability. Every strand refers to a specific aspect of central bank independence. In Section 3, we examine the links between independence and economic performance in terms of the level and variability of economic growth. Section 4 concludes the essay and summarizes the answer.

1. The meaning of independence

‘Independent central bank’ can be regarded as an institutional setting to ensure the
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