• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

“Discuss the advantages and disadvantages of an independent central bank”

Extracts from this document...

Introduction

"Discuss the advantages and disadvantages of an independent central bank" The case for the independent central bank is becoming increasingly accepted. When the first central banks were set up, their main objectives were to print money, and to ensure that this money was delivered to their appropriate destinations. Now however, the duties of the central bank have changed. Central banks are now subject to a much wider economic usage, amongst other policy objectives central banks are used for the reduction of inflation, and unemployment, as well as stabilizing the economic system. To understand the disadvantages and advantages of an independent central bank, we must first look at the motivations of the central bank. The theory of bureaucratic behavior suggests that the central banks acts in order to maxamise its own welfare, just as a consumer seeks to maxamise utility. Central banks welfare arises from its "power and prestige" (Mishkin). Thus we must remember, that according to this theory, when looking at the actions of the central bank, that it is acting in order to maintain and increase its power and prestige. Being independent of Government control poses a number of issues for economic debate. By being given freedom from government control, the independent central bank has full control over domestic, or in the case of the European Central Bank, member nations monetary policy, consequently commanding the interest rates and the money supply of an economy. ...read more.

Middle

Economists have been scepticle about the advantages of an independent central bank when it comes to the business cycle. This research demonstrates "clear 'political business cycle', in which the economy is destabilised by the proximity of elections, and an equally clear mitigation of this cycle when an independent central bank takes monetary policy away from politicians".(www.res.org.uk) According to another version of the business cycle, the 'rational partisan theory', the economy is affected not by governments changing their policy as an election is coming up, but the private sector changing its behaviour in view of the uncertain result. Suppose your union is negotiating a wage deal to cover the next 12 months, but knows there is going to be an election halfway through. Suppose one of the parties likes monetary growth at 10% a year, while the other aims for 2%. Rational workers will hedge their bets and go for an intermediate pay rise say 6% as an example. Then if the more anti-inflationary of the parties gets in, you will have 6% pay rises colliding with 2% monetary growth: a rise in unemployment ensues. If the '10%' party wins, then, by equal and opposite reasoning, it starts its term with a boom. Analysis of 20 countries over the period 1960-98 Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the UK and the United States confirms this theory. ...read more.

Conclusion

If the central bank is put in charge of keeping down inflation the government will consider that controlling inflation is someone else's job. This means that the government can pursue expansionary fiscal policies, or other inflationary policies, without fearing that it will be blamed for the consequent inflation. The clearest example of this is the period of German unification after the fall of the Berlin Wall. The government pursued German unification and a large budget deficit, while the Bundesbank was expected to keep down inflation. The consequence of this argument is that, given that many policies which cause inflation are popular apart from their inflationary consequences, since the consequent inflation can be blamed on someone else an inflationary bias is introduced into the system precisely by having an independent central bank. That is, having an independent central bank leaves the government an incentive to pursue inflationary policies. In conclusion I feel I have set out a balanced piece, demonstrating both the advantages and disadvantages of a system such as the ECB. Both arguments have merit to them, but after looking at the research I feel that the successful conclusion for this debate is to implement independent central banks as the power to spend money should most definetly be taken away from the power to create and control it. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Macroeconomics essays

  1. The Policy Implications of the Relationship between Inflation and Unemployment in Canada (1967 ...

    Critical Values at the 1% level are -2.62, -3.58 and -4.15 for None, Constant and Constant with Trend respectively. The results in Table 3 indicate that both inflation and unemployment are integrated order one I(1) and contain unit roots for each test statistic.

  2. The Global Economic Crisis. The present project analyses different approaches of the crisis ...

    The drop of demand for cars during the recession creates an example of the laws of demand and supply. The problem for the car retailers is that consumers being aware of the recession will rather save their money than spend it on luxury purchase.

  1. The purpose of this report is to explore Australias current economic conditions and how ...

    can be explained by Okun's law which is a relation between unemployment and GDP, whereby a 1.5% increase in GDP leads to a 1% reduction in unemployment. Figure 5 Source: ABS Investment Business conditions have remained quite stable, optimistic future outlook for some industries such as the resources sector while gloomy for other industries such as tourism.

  2. Communication Sector in Pakistan

    18.75 16.39 2.50 1.90 International Long Distance (per min.) 34.75 22 3.75 1.90 SMS On net 1.5 1.50 0.50 0.20 Of net 1.5 1.50 1.00 1.00 Source: PTA International Recognition of Telecom Policies ITU Elections Pakistan contested ITU elections for a Council Seat and Radio Regulation Board (RRB) membership.

  1. FDI and MNC Create More Multiplier Effect to The Host Economy As Compared To ...

    Jobs created stood at 246,361. In comparison to 2006 it was a 45% decline in job creation for the Indian job market in 2007. UK was at fourth position in terms of number of projects, which were 622 in 2007. In comparison to 2006, 2007 saw a sharp decline in the projected investment value (which stood at US$18.7 billion)

  2. Student Inflation

    Most problems within the group were resolved through discussion. Some of the positive aspects of working in a group were evident. Having five other people to share ideas with and discuss decisions resulted in a more comprehensive list of products to monitor as well as having the benefit of supplying varying approaches on how best to tackle certain parts of the project.

  1. deflation in japan

    Figure 1 Discount Rate of the Bank of Japan from 1990 to 2001 Source: Deflation and Japan Revisited, 2005 Base on macroeconomic theory, there is a formula which is P=D / S. P: prices D: aggregate demand S: supply of goods In this formula, it is easy to understand that

  2. "It was a supply-side shock, not deflationary monetary and fiscal policies, which initiated depression ...

    of employed workers, Y is output and L is the size of the labour force. Rewriting and combining the price and wage equations we get: P = Pe(1+()F(1 - Y/L,z) The aggregate supply relation above implies an upward sloping aggregate supply curve. The intuition behind this is as follows: i)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work