1. INTRODUCTION In 1962, Milton Friedman wrote the essay “Should There Be An Independent Central Bank?” Since then, half a century has passed. Nowadays, many countries in the world have their independent central banks. But the discussion about whether central banks should be independent does not end. This paper will try to 1) provide the arguments on both pros and cons whether central banks should be independent; 2) provides evidence about the relationship between central bank independence and inflation in developed countries, developing countries and transition countries. 2. THE PROS AND CONS ARGUMENT ON WHETHER CENTRAL BANKS SHOULD BE INDEPENDENT The main reasons that central banks should be independent are following. First, if central banks are not independent, it is likely to result in inflation, because politicians in democratic societies are usually short-sighted when making monetary policies. They might put the election winning as the most important issue, which could lead to little attention to price stability such a long-term goal. In order to win an election, central banks controlled by governments are motivated to do anything which may help to decrease unemployment rate even it is possible to allow the genie of inflation out of the bottle. Alesina et al. (1989) believed that there might be a political industry cycle. That is to say, when the election is coming, government is incentives to implement expansionary policies to reduce unemployment and interest rates, but after the election, the adverse consequences of previous policies, such as high inflation and high interest rates, are likely to appear. Therefore, independent central banks are more likely to focus on long-term goals, fight against inflatio... ... middle of paper ... ...bal public goods: managing globalization. Oxford University Press, 2003. Loungani, Prakash, and Nathan Sheets. "Central bank independence, inflation, and growth in transition economies." Journal of Money, Credit, and Banking (1997): 381-399. Love, James, and Tim Hubbard. "Paying for public goods." Code: Collaborative ownership and the digital economy (2005): 207-229. Marwell, Gerald, and Ruth E Ames. "Economists free ride, does anyone else?: Experiments on the provision of public goods, IV." Journal of Public Economics 15.3 (1981): 295-310. McCallum, Bennett T. "Crucial issues concerning central bank independence." Journal of Monetary Economics 39.1 (1997): 99-112. Xingzhong, LI Daokui David YIN. "The International Monetary System in the Era of Post-Financial Crisis: What Policy Options Does China Have?[J]." Journal of Financial Research 2 (2010): 005
The first goal of the Fed’s dual mandate is for the United States to have maximum employment and good economic growth. They just want to make sure the country stays out of a recession and the unemployment rate is kept low. The second goal is price stability or simply stopping inflation. Without keeping inflation stable the U.S dollar will lose it value in the world economy and cause all sorts of new problems for the country. (Federal Reserve Bank of Chicago) The Federal Reserve makes a lot of decisions based off of what the outcome
On the surface, central bank independence seems an eminently reasonable, appealingly simple solution for an agonizingly complex and muddled process of making economic policy in this postindustrial, electronically linked, and computerized global economy. The independent central bank is an institutional concept that complements well the counterrevolution now underway in U.S. budget policy. Washington's fiscal policy is locked into a deficit-cutting mode for the near future, while Congress is determined to retreat from all discretionary spending, regulatory intervention, or measures to improve equity in the distribution of national income and wealth.
Most Americans feel the United States of America is a beacon of democracy and raw capitalism, the leader of the “free” world. The founding fathers had every intention of turning the new world into a full fledged democracy, devoid of any monarchy or source of totalitarian power. The constitution itself demands that our government be “of, for and by the people”, and be divided into complex units of checks and balances, designed to thwart any potential power struggle by one specific branch. In essence, the constitution of the United States is a perfect blueprint for democracy in its purest form, with power and control in the hands of its citizens. Unfortunately, this is not the case today. By giving up the right to print its own currency in 1913, the US Government bequeathed its powers to a select few, who have owned and operated this country ever since. They are the true masters of US domestic and foreign policy.
Metzler, Allan H. A History of the Federal Reserve, Vol I and II. University Press Books, 2002
Journal Of Political Economy, 95(6), 1307. http://www.brainyquote.com/quotes/quotes/b/benwhishaw517375.html#BuGImMQjmwhFOTBO.99
Mishkin. F. C. (2009). The Financial Crisis and the Federal Reserve. NBER Macroeconomics Annual, 24, 495-508
A central bank’s main tool to achieve this is by influencing the interest rates by introducing or taking away cash in an economy. So by carefully watching an economy, they can change interest rates, which would ultimately stimulate or reduce demand to lessen the impact of booms and busts. In theory this would limit confidence and fairness by manipulating prices through the process of inflation, and could have a further reaching impact with money illusion. So if confidence was really high and potentially fueling a bubble, the central bank could artificially increase the interest rate. This would make lending harder and would decrease the amount of investment and potentially decrease whatever bubble was building. Most of the time too the central bank exists outside the pressures of the political world, so the bank can make informed and rational decisions. In doing so the central bank can dampen the effects of animal spirits by providing a guide for economic actors through interest rates and effecting
...ijffinger, Slyvester C.W, and Jakob De Haan. The Political Economy of Central-Bank Independence. Rep. no. 19.
Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress
The massive increase in the Chinese trading relations was fueled by the United States in the year 1979 through the normal trade relations between the two countries. In addition, the Chinese non-concession to the World Trade Organization (WTO) in the year 2001 also facilitated its trading activities with different countries including the United States (Kaplan, 57). However, trading relations with the Chinese have been uneasy resulting from the massive trade imbalances in the recent past, which grows exponentially. The protectionist policies of the United States especially in Washington and Beijing have been putting pressure on the Chinese to revalue their currency as well as protecting it from counterfeits, which may be of adverse effects to the trading relations. This paper gives a comprehensive discussion on the foreign trade relations with china. It further gives an elaborate discussion on the impacts of foreign tr...
“[…] it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, p...
One of the most recent examples of ethics and technology conflicts in the United States are privacy issues and how we cite, distribute and publish intellectual property on the internet. For instance, many corporations and people take advantage of the open access of the internet and the lack of legislation governing the right to post and upload information to the internet. Today, nearly every household in the United States has a computer with int...
O'Sullivan, A., & Sheffrin, S. (2005). Economics. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.
Knorr, Caroline, “Illegal Downloads: When Sharing Becomes Stealing” (November 19, 2010) https://www.commonsensemedia.org/blog/illegal-downloads-when-sharing-becomes-stealing (March 31, 2014)