Question

Does Central Bank Independence Improve the Efficiency of Monetary Policy? Discuss with examples.

Answer 1

Answer- yes, central Bank independence improves the efficiency of monetary policy.

Central Bank independence refers freedom of monetary policy makers from direct political or government influence in conduct of policy.

Because of following resons central bank independence is necessary:

- government make poor monetary policy which tend to be short term policitical considerations

- before an election, the temptation is for a government to cut interest rate making boom and bust economic cycles.

-an independent central bankbank may have more credibility If people have more confidence in the central bank, this help to reduce inflationary expectations.

In 1997, Bank of England gave the full independence in setting monetary policy. Between 1997-2007 the central bank did a good job in keeping inflation low, enabling a long period of expansion.