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Research Project - "Can the Central Bank in Jamaica be truly independent?"

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Introduction

Stephen Snider Economics - Unit 2 Research Project - "Can the Central Bank in Jamaica be truly independent?" Table of Contents What is the Central Bank? 1 Why Should the Central Bank be Independent? 4 Why Should the Central Bank be Regulated? 6 Conclusion 8 Bibliography 9 What is the Central Bank? As defined by en.wikipedia.org a central bank is the entity responsible for the monetary policy of its country or of its group of member states as in the European Union. Also called a reserve bank or the monetary authority, it has two vital roles in the macro economy. It oversees the whole monetary system of the country. It must maintain the stability of the national currency (eg the Jamaican dollar) and money supply as well as control interest rates. It may also be necessary for the bank to save a recognized, private bank in times of financial crisis, especially if the bank is an integral to the national financial system. It does this by acting as a bailout lender of last resort to the banking sector. The second role of the central bank is that it acts as the government's agent by being its banker and in carrying out the country's monetary policy. The central bank finances the activities of the current government and in most cases, works in close contact with the government's treasury. ...read more.

Middle

The independent B.O.J. would operate under rules which would be designed to prevent political interference. Why Should the Central Bank be Independent? Since the late 1980's, more and more countries have freed their central banks from political control. The have made their banks independent because of evidence showing that this independence had a successful record of achieving monetary stability. One can see from the graph below the evidence. The central bank of the countries listed was made independent (on average) in 1986. It is seen that the inflation rates are considerably lower then when the country had a regulated central bank. Central bank independence is seen as essential by many to counter the natural preference of politicians for expansionary economic policies that promise short term electoral gains at the risk of worsening inflation in the long run. Making central banks independent frees them from political pressure and thus removes the inflationary bias that could otherwise unsettle monetary policy. Another reason to call for independence is that political interference more often then not makes a bad situation worse. Political pressures not only weaken financial regulation, but also hinder regulators and supervisors who enforce the regulations against banks that run into trouble. In doing so the politicians cripple the financial sector in the run-up to the crisis, delayed recognition of the severity of the crisis, slowed needed intervention, and raised the cost of the crisis to taxpayers. ...read more.

Conclusion

The government will often times pursue programs that increase aggregate demand which help to fuel inflation. Therefore, although independent central banks promise lower inflation, this lower inflation may be countered by other government policies. Conclusion The benefits and disadvantages to giving the central bank its independence have been discussed, but it is my opinion in the case of Jamaica that the costs outweigh the benefits. It should be the aim to one day free the central bank so that it can be more efficient, lower inflation, and prevent needless borrowing, however with the current situation of the country's political situation it would be impossible to have a proper independent central bank. The inflationary policies that this government is currently pursing would counter the deflation that the central bank could gain. Also, the political cowardice of many politicians to take responsibility for their actions would hinder the bank as no one would want to take accountability for its actions. Nor is the government strong enough to prevent the central bank from being influenced by outside forces (private and foreign banks). It is better for the B.O.J. to stay how it is now. When the government can be restructured and when the government finally realizes that inflation and the uncontrolled debt must be addressed then it should be made independent. If it was to be done now, it would only put a heavier strain on our already burdened economy. ...read more.

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