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Wessel: Are Central Banks Putting Their Independence at Risk?

Buy custom Wessel: Are Central Banks Putting Their Independence at Risk? essay

Most well known central banks have enjoyed independence from the influence of politicians for around twenty years. Elected politicians have tried to influence operations in the central banks with no success. The central banks have warned politicians about meddling in their businesses. The banks argue that for desirable inflation rates to remain low, politicians should not protest when the rates are adjusted upwards or downwards. Many politicians in most countries gave the central bank the independence and the countries were rewarded by growth and inflation in some periods. This agreement worked very well until the financial crisis in 2007.

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Many economists are arguing that the autonomy enjoyed by central banks is not simple to maintain. This is due to an increase in the functions of the central bank that revolve around the government and the country’s economy. The central bank is mandated with the purchase and sale of long term government bonds. It is also tasked with managing inflation and maintenance of a stable financial scenario in a country. The bank oversees the avoidance of any excesses that result from financial instability, which can spiral into a monetary crisis. Many people do not see why he central bank should maintain independence in its operations. The complication arises because many people view the central bank as a means of maintaining stability that should be easily controlled and used at will.

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In a conference held by the International Monetary Fund (IMF), the economists present reviewed the macro policies in many countries. The reviews raised two great issues. They suggested that central banks were compromising their own independence. This is done by aggressive bond buying and creation of policies that affect the economic situation. The creation of policies is seen as a way the central banks get into the roles of elected legislators. This, in turn, causes the legislators to intervene in the operations of the central bank.

The aggressive buying of bonds done by central banks was termed as naive by Lorenzo Bini-Smaghi. He said that such central banks will be unable to resist political pressure to maintain low interest rates for a long period. He said that a central bank’s independence is compromised once when it engages itself in the realm of fiscal policies. He also stated that if a central bank acts in a timid manner, it will risk its independence and the ability to stabillize the economy. This was clearly explained by Martin Wolf, a columnist with the Financial Times. He cited the example of the Bank of Japan.

The governor of the Bank of England contributed in the discussion by agreeing with the facts provided. He stated that the real problem would arise if the central bank is promising too much or if people expect too much. This is caused by the political pressure that is piled on the central banks. If a bank is able to define the limits of its monetary policies, it would operate independently. Many politicians view policy instruments as the most effective way they can pressure the banks: a proper description in the policies is required.

Macro prudential policies should be put in place in order to prevent the government from interfering in the operations of the central bank. The central bank should maintain some independence for it to able to control inflations or booms in the economy on its own terms. The independence should not be so much as to risk the taxpayers’ money. The governor must have independence in terms of monetary policies and financial stability. However, in terms of operations, a level of supervision should be done by the political leaders.

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