Michael Tsiagbe 0927139 BSc Econ
Discuss the effect of greater Central Bank independence on inflation, both intheory and with respect to empirical evidence
The following paper will explore the concept of Central Bank independence and thearguments for and against it supported by theory and empirical evidence alike. This paper willbe structured as follows: Section ia will introduce the concept of inflation, section ib will lookat the Central Bank and its purpose within an economy, section ic will look into the concept of Central Bank independence, sections iia and iib will look at the theoretical and empiricalaspects of Central Bank independence respectively, iic will look at scenarios where greaterCentral Bank independence may not always work and finally section iii will conclude thepaper.
ia. What is inflation, and what causes it?
By the end of 2001 the average house price in the UK was £92,533
, by the end of fourthquarter of 2010 on average house prices were £162,379
. This increase in overall price levelsis known inflation best defined as the continuous increase in the overall price level within aneconomy inflation can be a problem for many economies small and large alike. The modernmeasure of inflation, known as the Consumer Price Index (CPI) is a weighted measure of a basket of goods from which the average price level is derived on a month to month basis(within the UK). Inflation has long been a conundrum for governments and Central Banksalike, especially in their pursuits of trying to eliminate the economic undesirable of highunemployment.
Figures provided by http://www.housepricecrash.co.uk/indices-nationwide-national-inflation.php
Mankiw, Principles of Macroeconomics, page 75