Autonomy of Central Banks

Topics: Monetary policy, Inflation, Keynesian economics Pages: 3 (732 words) Published: March 31, 2012
nomy of central bank MACROECONOMICS 1.Central banking:
-management of public debt of government (agent of government & no autonomy) -Regulation & supervision of banking entities(Here the role is of lender) -financing of development activities and other associated functions(in this close coordination with government) 2.central bank independence:

-Personal matters
In this case gov. Distances itself from appointment,dismissal procedures of top central bank officials and governing board Extent and nature of representation of government in governing body of central bank -Financial independence:

This indicates freedom of central bank to decide gov expenditure is either directly or indirectly financed via central bank credit Direct access to central bank implies that monetary policy is subordinated by fiscal policy -Conduct of policy

This indicates flexibility given to central bank in formulation and execution of monetary policy Goal Inependence:
Central bank chooses policy priorities of stabilising output or prices at given point of time,hense setting goal of monetory policy. Instrument Independence:
Central bank is only free to choose the means to achieve objective set by government Theory:
1.Dynamic or Time inconsistency theory:
-This arises when best plan made for a future period is no longer optimal when the period actually starts In case of monetory policy this problem arises because there are incentives for a politically motivated policymaker to try to exploit short run trade off between employment and inflation Expansionary monetary policy-produce high growth and employment in short run,hense policy makers looking for this policy.In long run it leads to high inflation with dangerous consequences. Remedies/solution for time inconsistency:

-conservative central bank approach
-optimal contract approach
2.Political business cycle theory:
This indicates interaction between economic policy decision and...
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