Central Bank’s Independence and Implementation of Monetary Policy Page 5 Internship Report 1. Introduction The central bank of any country plays a vital role in the economy of that country. It plays a major role by being Government’s bank and helps Government in smooth running of economic affairs by maintaining the price stability in the system. Historically, the role of the Central bank was to print money, hold foreign reserves, formulate monetary policy and act as Lender of Last Resort (LOLR).
The beginning of the 1990’s marked the new era in the history of central banks’ roles, when Reserve Bank of New Zealand was granted the clear objective of maintaining the price level stability in the economy with operational independence to achieve this objective. Soon Bank of Australia, England and Canada were granted the same autonomy. But this only objective was confined with central banks of developed countries, whereas central banks in developing countries are performing another role and that is to support growth in the economy. Developing nations’ central banks have since then have shifted their focus in order to achieve these goals.
Historical data of Inflation and GDP growth of developing nations suggest that these both goals have not been achieved, if achieved then their sustainability remains short. This may be due to some missing factors like Central Bank’ Independence and autonomy whether in goal setting or in ways through which it achieves its goals. Thus the objective of the study is to find out whether SBP, in its completion of goals is independent or not? And is there any relationship between CBI, macroeconomic variables and effective implementation of monetary policy.
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The climate in a group is very important. It greatly influences the outcome of the situation and the outcome of the problem. The amount of support, the type of messages, and the degree of cohesiveness are the defining factors which determine the climate of the group. The film ?Waking Ned Devine? shows all these factors throughout the movie, especially in the church scene. A defensive climate ...
Section 1 covers literature review, section 2 of this paper covers definition of CBI, section 3 of the paper explains how CBI is measured; section 4 shows relationship between CBI and economic performance and section 5 concludes the report’s main points. Central Bank’s Independence and Implementation of Monetary Policy Page 6 Internship Report 2. Literature review Cukierman, Alex, (2005) in his paper Central bank independence and Policy Results: Theory and Evidence has put great emphasis on the high level of Central Bank Independence (CBI) and argues that it is the desirable feature of any monetary policy making institute.
He states that the most important responsibility of the Central Bank (CB) is to assure price and financial stability and to achieve its main objective the bank should have (a) Instrument independence, (b) bank should not lend to government, (c) bank should have sufficient financial independence and (d) bank’s high officials shall hold posts for longer tenures and they should not work anywhere else in order to avoid conflict of interest. Author further goes on to explain existing relationship between CBI and economic performance in the areas of Inflation, growth, investment and real rates in his paper.
Walsh E. Carl, (2005) in Central bank independence prepared for the New Palgrave Dictionary defines CBI as “the freedom of monetary policymakers from direct political or governmental influence in the conduct of policy”. Carl in the later part of the paper states that many developed countries after 1980’s have granted greater independence to their monetary authorities and these reforms have shown negative correlation between CBI and stable and low inflation rate. In the case of developing countries, he says that there exist positive relationship between CB Governors’ turnover rate and inflation.
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Whether a person is aware of it or not, everywhere they go, they are mentally judging people and creating an opinion about others without necessarily ever even meeting them. These judgments can be based off of simple appearance, or actions, or any other sort of visible aspect of a person. Simply put, humans are judgmental creatures. One of the most common aspects of a person’s life that is judged ...
Paper highlights that critics of the reform movements towards central bank independence have expressed concerns that independence can weaken the accountability of central banks and they should be supervised in their goal setting and implementation process. Alpanda et al. , (2009) in Political monetary cycles and a de facto ranking of central bank independence state that political monetary cycles are less likely to occur, in countries with independent central banks. CB, if independent can resist political pressure exerted to stimulate the economy before elections in the form of increased government spending or tax cuts.
Writers further argue that money growth is larger among countries having low CBI in election periods vs. non election periods. Two variables were used to identify occurrence of political monetary cycles i-e M1 and election dates of the national leaders. Alpanda et al. , have ignored the borrowing capacity of government as high capacity of borrowing would Central Bank’s Independence and Implementation of Monetary Policy Page 7 Internship Report lead to lesser need for distortion in monetary policy.
Rankings are therefore derived from the behavior of central banks during election cycles when their independence is likely to be challenged or their lack of independence is likely to be revealed. Siklos L. Pierre, (2008) in “Does central bank’s independence still matters? ” says that the term “independence” defines the position a monetary authority has in the state of affairs. Author states that CBI has been loosely defined to meet the needs of countries such as turnover rate (TOR) and on other side it has been defined as set of characteristics that are legally defined and show relationship between government and CB.
Author argues that CBI is not measured as a single index but is set of dejure and defacto characteristics and of those the optimal level cannot be found. Four elements of each characteristic are selected to convey negative relationship between CBI and inflation. Jeroen et al. , (2009) in their paper “Inflation and central bank independence: A metaregression analysis” elaborate that many countries granted their monetary authorities greater independence.
The Term Paper on Arguments For And Against An Independent Central Bank
1.Introduction The European Central Bank (ECB) is a part of the attempt at European Monetary Union (EMU) and is the single locus of the European System Central Banks (ESCB), which has been formed from the voluntary union of national central banks, and the ECB itself. The National banks, like the Bundesbank, have however not been abolished. They merely become operating arms of the ECB. The ECB ...
According to authors, to identify whether there is any relationship between CBI and inflation, one needs an indicator of the extent to which the monetary authorities are independent from politicians. Most empirical studies use either an indicator based on central banks’ laws in place or TOR. Authors suggest that countries with a more independent central bank will, on average, have lower levels of inflation. Billin, (2001) in “Central bank independence and economic performance in Eastern Europe” writes that both the measures of CBI and of financial market development (FMD) show significant association with macroeconomic variables.
Next section of his paper examines both the trends and the economic performance in eight Eastern European countries and the degree of CBI granted after reforms. The author argues that both CBI and FMD may facilitate market reforms by helping to enforce fiscal and financial discipline. Author’s empirical inquiry via correlation analysis suggests positive association of both CBI and FMD with price stability. Jose De Gregorio in his presentation on Central Bank Independence and the Effects of Monetary Policy (2005) says that legal CBI is negatively correlated with inflation in Eastern European and Latin American countries.
Furthermore, he goes on to say that legal Central Bank’s Independence and Implementation of Monetary Policy Page 8 Internship Report independence is precondition to gain credibility in countries where inflation records are poor for independent functioning of the CB. He concludes on the point that narrow pass through of exchange rate to import prices and macro economic performance is positively linked to CBI. Jacome et al. , in their paper “Any Link Between Legal Central Bank Independence and Inflation” Evidence from Latin America and the Caribbean” (2005) have tried to find out negative relationship between legal CBI and inflation.
They have used different measures of legal CBI like the rules for the appointment of central banks’ board of directors, the degree of CBI in the conduct of exchange rate policy, rules governing Lender-of-Last-Resort (LOLR) facilities and legal requirements on accountability and transparency and the results show negative relationship between legal CBI and inflation after controlling for international inflation, banking crises, and exchange regimes in the sampled countries. Central Bank’s Independence and Implementation of Monetary Policy Page 9 Internship Report 3.
The Coursework on Central Bank Inflation Independence Zealand
... findings sum up the near perfect negative correlation between CBI and inflation. Role of Central Bank Independence There are many research reports undertaken that suggest ... P 153) who use political independence and economic independence as their ways of measuring central bank independence. "Political independence is defined essentially as in Bade and Parkin ...
Defining Central Bank Independence Defining the concept of Central Bank’s Independence (CBI) is a tricky job. It seems to be an unambiguously defined concept now, because we as authors end up defining our own understanding of it. Large amount of work has been done to argue that high CBI is directly related to the long term economic performance. The primitive work on the definition of CBI was done in 1824 by David Ricardo who emphasized on issuance of the currency by Commission elected by government and communication hindrances between them on the issue of lending currency to the state.
The advocates of the high CBI throughout the world are found to be on the common grounds i-e they all agree to it that if central bank is not independent politicians can abuse the power of printing money and this is how they can distort the inflation and output level in the economy in order to earn political gains, whereas central bank is seen as playing role in the best interest of the society. It is also considered that there may be no single and right definition of CBI, but in general it is defined within two factors/aspects of the independence; Independence of objectives and Independence of instruments.
Independence of objectives refers to the autonomy central bank has in setting its own goals whether that can be of inflation targets, money supply, exchange rate management or others. Independence of instruments refers to how much central bank has independence in determining the best possible ways to achieve its policy goals. This bifurcation is widely accepted by Fraser (1994), Briault et al. , (1996), Amtenbrink et al. , (1998) and Debelle (1995).
Siklos, (2008) argues that the definition of CBI has not been defined narrowly. Some measure it in the turnover rate of governors (see Dreher et al. 2007)) while others state that it the existing set of characteristics that defines relationship between the government and the central bank. The bottom line is that economists are still trying to precisely define CBI and its significance for achievement of the required targets set by government or central bank. Central Bank’s Independence and Implementation of Monetary Policy Page 10 Internship Report 3. 1 Measuring CBI In order to gauge the independence of CB, following criteria have been selected: ? Appointment of the CB Governor: As per literature review, appointment of the governor comes under legal independence of CB.
The Essay on Define Democratic Government Direct Democracy
1. Define Democratic Government. Suggest three Democratic inadequacies in Britain today. Democratic government is a political system based on the principles of freedom and equality. Democratic government mental systems embrace multi-party Parliament. They advocate free and fair elections, where every voter has a one vote, and no vote counts more than another. Democratic governments advocate basic ...
