MAE Assignment 6

Q: Make a case for or against the central bank independence by reading the following
resources in addition to the knowledge gained from the text book.

Ans. The answer to this question when making a case may not be definitive, i.e. yes or
no, but it's about if the central bank's autonomy is increased or decreased. I accept
that the autonomy of the central bank is highly important in the context of today. There
are already some indicators of central bank independence, such as the rules for
appointing and dismissing central bank governors, the central bank's ability to finance
its operations without relying on government, central bank's goal setting, monetary
expansion or contraction, etc.

It was noted that the independence of the central bank is inversely proportional to
inflation. This is the same for developed countries as well as developing countries. In
increasing the inflationary era of the 1980s, the central bank has already proven its
worth in. In setting goals and managing inflation, the central bank will continue to
embrace autonomy. Otherwise, by reducing unemployment, politicians tend to loosen
monetary policy and increase inflation suddenly. In order to combat increased inflation
due to expansionary fiscal policies, central bank independence is also necessary, a
trend that has been noted in recent times. In addition, monetary policy is usually tried
on a medium-term basis, for which fiscal policymakers are not well equipped. Most
developed economies ' central banks, including the US, have demonstrated their
ability to maintain the low level of inflation on an average over the past 3 decades.
This is the product of their freedom.

This should, however, come with greater accountability and transparency. This will
help central banks avoid intervention by policymakers. To order to maintain this
autonomy, central banks also need to retain their reputation, which has weakened as
a result of crises to 2008 when Lehman failed to collapse. In addition, for most
developed and developing countries, the complementary monetary policy with fiscal
policy needs the hour.

But the central bank also faces some obstacles for being independent in its decisions.
One of the challenges facing the central banks is the ongoing political tension. The
dilemma is that due to expansionary fiscal policies, the central bank should be
responsible for funding expanded fiscal deficits. According to the CFM survey, most
experts believe that the independence of the central bank will decline due to political
pressures. Increasing populism is also attacking technocratic institutions to reduce
their powers, including central banks.

So, the key in the current scenario is the independence of the central bank with a high
level of accountability and transparency in its operations and setting goals.