Analysis of the economic arguments of an independent central bank Essay

Analysis of the economic arguments of an independent central bank - Essay Example The Latin American inflations are fable material with inflation rates sky rocketing often to 200% or more. In some extreme cases what was affordable at twilight became unaffordable by daylight. With complex and fine lending and borrowing of money as investible funds, interest rates have turned indicators that are pliable in the hands policy makers or dictators as the case may be.Government, myopic with political avarice, and desirous of sweeping hustings have dictated lower interest rates, keeping economic realities on window sills. This tended to raise up spending and then employment though only in the short term, but finally and in the medium to long term it caused severe inflationary pressures. Inflations were crippling when such spending was directed less towards real sector and more towards wasteful expenditure resulting in the physical output not meeting the heightened stock of money in circulation. It is at once natural for a political system to dictate manipulation of monetar y policy and maintain only a short run vision of popularity in or around the election period even risking higher inflation just because this option always was available to detractors or competitors for votes. The Keynesian prescriptions did not build a specific treatment of inflationary situations despite the fact that such situations had arisen. It was preoccupied with determination of the output levels and relied only on a simplistic analysis of inflation via media the demand and supply theory of money. Enunciation of the Phillips curve added a logical sequence to analysis of inflation. The Phillips curve, in its native form, posited a long-run trade-off between inflation and unemployment. However this causality has been reexamined and redefined theoretically and... This paper presents a thorough theoretical analysis of the varying role of central banks in an economy, in an attempt to find the optimal level of central bank`s independence from state. Central banks the world over have quiet but strong presences. With low public visibility they perform the most vital of functions with that of creating and putting into circulation legal tender money. As is known legal tender money serves as a means of payment, a unit of account and a store of value. The most preferred favoring an independent central bank is that the power to expend money should be separated or delinked substantially from the power to create money. In case these two capabilities converge we have spendthrift governments indulging in fiscal profligacy while the Central Bank simply acts as a 24/7 mint or currency printing house. While political masters may be tempted to manipulate monetary policy to suit their short term political objectives the Central banking professionals, having no such ulterior targets, nurture and design monetary policy generally on a long horizon. Protecting monetary policy decisions from State dictates can better assist the cause of lower inflation while a decent economic growth rate can be targeted concurrently. Short run considerations of political nature force the economy in bouts of uncontrolled accelerations which often turn uncontrollable and unsustainable. In nearly every major financial crisis political interference in financial sector regulation helped make a bad situation worse.