Question

Economics Question:

Discuss the major pro and con for the independence of the central bank from the political government administrations. Which argument is more persuasive to you and why?

Answer 1

Pros of independent Central banks are:

.Governments tend to make bad monetary policy decisions. In general, short-term political considerations appeared to affect them.
Before an election, a government is tempted to cut interest rates, increasing the likelihood of boom and bust economic cycles. Therefore, it is probably better to take monetary policy out of the hands of the government. If the government has a track record of encouraging inflation, inflation expectations begin to rise, increasing the likelihood of inflation.
There may be more legitimacy for an independent central bank. It helps to reduce inflationary expectations when people have more confidence in the Central Bank. This in turn makes it easier to keep inflation down.

Cons of independent Central banks are:

Stick to the wrong targets rigidly. The ECB has been criticized for sticking too rigidly to the low-inflation target when Europe has far greater problems with unemployment and low growth.
Economic policy is set by officials who are not elected.
Concerns about the wider impact of monetary policy, such as the effect on income distribution between savers and borrowers from low interest rates.
There has been a change in the economic climate since Central Banks became autonomous. Inflation and booms are no longer the biggest problem. Rather, the problem is one of prolonged liquidity trap and secular stagnation.