Central Banking Recent Trends and Debates
Central Banking: Recent Trends and Debates
Central Bank Independence
The term autonomy, or independence, in context of Central Banks, refers to how freely the monetary policy makers can conduct policies with little or no interference from the government. Also referred to as the “autonomy” of Central Banks, the definition of independence considers two important aspects. They are political independence and economic independence, However, nowadays these aspects have more popular names: “Goal independence”, “Target independence” and “Instrumental in dependence”.
1) Goal Independence: Allows the Central Bank to decide its own monetary goal and/or exchange rate system, exclusive to the direct influence of the politicians. In the case of a floating exchange rate system, the central bank solely concentrates on the monetary policy. Some common monetary goals are maintaining price stability, controlling money supply or increasing real growth in the economy
2) Target Independence: When the central bank is goal dependent, i.e. the state decides the macroeconomic objectives, it lets the central bank set the target value to the goal and to come up with the policy instruments with which it will achieve the target. For instance, if the state wants to keep the inflation rate at a low level of 2 percent, it will probably adopt a contractual monetary policy where the interest rate is set at a very high level.
3) Instrumental Independence: This is probably the least independent dimension among the three that we have been discussing. The government “consults” the central bank and sets the monetary target. The Central Bank is said to be instrumentally independent as it is free to choose the policy tools to attain a macroeconomic goal. Besides that, it is both goal dependent and target dependent on the government. The instruments applied by the bank are: Open-market operations, discount lending and reserve
Central Bank Independence
The term autonomy, or independence, in context of Central Banks, refers to how freely the monetary policy makers can conduct policies with little or no interference from the government. Also referred to as the “autonomy” of Central Banks, the definition of independence considers two important aspects. They are political independence and economic independence, However, nowadays these aspects have more popular names: “Goal independence”, “Target independence” and “Instrumental in dependence”.
1) Goal Independence: Allows the Central Bank to decide its own monetary goal and/or exchange rate system, exclusive to the direct influence of the politicians. In the case of a floating exchange rate system, the central bank solely concentrates on the monetary policy. Some common monetary goals are maintaining price stability, controlling money supply or increasing real growth in the economy
2) Target Independence: When the central bank is goal dependent, i.e. the state decides the macroeconomic objectives, it lets the central bank set the target value to the goal and to come up with the policy instruments with which it will achieve the target. For instance, if the state wants to keep the inflation rate at a low level of 2 percent, it will probably adopt a contractual monetary policy where the interest rate is set at a very high level.
3) Instrumental Independence: This is probably the least independent dimension among the three that we have been discussing. The government “consults” the central bank and sets the monetary target. The Central Bank is said to be instrumentally independent as it is free to choose the policy tools to attain a macroeconomic goal. Besides that, it is both goal dependent and target dependent on the government. The instruments applied by the bank are: Open-market operations, discount lending and reserve