Supervised by: Prof. John Adams
Central Bank Independence and Inflation
Monetary and Fiscal Theory and Policy
`Prepared by: Noha Gamal
Central Bank independence either Political or Functional being essential in the control of inflation is an issue of argument and there are different views on it supported by Evidence. This Paper will focus on considering these different point of views starting by describing Central bank independence, what central banks do, and who controls them which makes us reach the aim of the argument as to whether the independence help control inflation or not, or in other words, is it necessary or of any effect on inflation
* What are central banks and what do they do?
* Who control central banks?
* Independence of the Central bank and effect on Inflation
2- Literature Review
* Review of the literature on the effect of Central bank independency on inflation and the aspects the Central bank must follow in dealing with inflation
3- Central Bank Independence
* Who control Central banks and The aim of the CB
* CB independence both politically and Functionally
4- Empirical Analysis
* The Croatian Central Bank (CNB) and its independence
* CB and their role
* Literature outcomes
* Alternatives to CBI
* Recommendations for further research
Central Bank Independence and Inflation
he Banking System, with all the transactions, the pumping of money in the banking system (Monetary Policies) and the Governmental taxation and Purchases (Fiscal Policies) are affected by the environmental conditions of an economy and therefore economic indicators like Inflation and Price stability are bound to be altered in the process. As a start, describing the central bank and its role is of high importance. The Irving Fisher Equation "MV=PT" is the main instrument of explaining the monetary policy (changing the Money Supply "M") on the Price "P" and transactions "T" with noticing the importance of the velocity of circulation "V" and its effect of making the change in M of no effect in some cases. This depends on the transmission mechanism (Heakal, 2010) Mentioned that the CB is referred to as "Last Resort Lender"; meaning that it is the supplier of funds when there is a shortage in the supply of funds within commercial banks. It can as well be explained as the backbone of the banking system which secures it from failing in the last minute. This role of the central bank was long ago available but increased more frequently with the shifting of the world currencies from the "Gold Standard" (GS), because of the increase in the problem of price stability, which was limited in the GS era. This is because gold was limited in amount and so there was no such thing as the problem of printing money (Quantitative Easing) available today by political decisions. Therefore, inflation was controlled at ease as opposed to today. The Central bank control varies across countries with differences in the political regime in control. For the stability of the prices and the currency, the Central bank has to be an authority that regulates the system. For this to happen there must be some sort of government control; not too much but at the same time not absent nor of a negligible effect. The debate on the effect of the independency of central banks on inflation and price stability began with the start of the First World War. This was because of the need of extra money, which increased the printing of money by the government, and so increases inflation. From here the Political independence of the Central bank arose. On the other hand, in the process to recover the economy after the WWI political dependence of the central bank was needed, but again, after the recovery, independence was back in play. This unstable requirement of independence was a factor that caused the debate of the Central...
Bibliography: Diana, G., & Sidiropoulos, M. (2003). Central Bank Independence, Speed of Disinflation and the sacrifice ratio.
Eijffinger, S. C., & Hoeberichts, M. (1996). THE TRADE OFF BETWEEN CENTRAL BANK INDEPENDENCE AND CONSERVATIVENESS. Center for Economic Research .
Hayo, B., & Hefeker, C. (2001). Do We Really Need Central Bank Independence? A Critical Re-examination. university of Basel Discussion papers.
Heakal, R. (2010, June 5). Investopedia.
Smaghi, L. B. (2007). Central bank independence: from theory to practice. European Central bank .
Tomislav Ćorić, D. C. (2009). Central bank independence:The case of Croatia.
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