macroeconomics, central-bank, pop-economicsI’ve seen in the news that Hungary’s government is highly criticized for a constitution that might reduce independence of the country central bank.
I also saw many movies / articles that argues that current system of central bank is parasitic and should be abolished providing also some links to conspirational theory.
Usually there are brought examples of some unsuccessful attempts to establish a system without an independent central bank made by Napoleon, Hitler and others.
I assume that if there was an easy, much better way of having such a system it would already exist know as that country would have a dominant economy and would serve an example for others as it is with the current system which is a defacto standard and was established by Great Britain and USA.
I would like to know from a more scientific or logic point of view why central bank should be independent, are there scenarios when the independence should be minimized or extended in order to improve economic situation.
Also there are claims that by corruption central banks from many countries are controlled by oligarchy thus a realizing benefits for the few and disadvantage of many. Is it really so?
The chief reasons for permitting the central bank independence and autonomy in a democratic country is long term stability. Specifically, politicians with short term electoral goals have an incentive to introduce populist measures which boost the economy (or specific electorally significant areas of the economy) in the short term but are far more damaging in the longer term. An example of this would be quantitative easing (in plain terms: pumping newly created money into the economy) when the economy is running smoothly in the hope that this will generate an economic boom just before an election. It’s also worth pointing out the obvious: the average member of a central bank has considerably deeper and broader knowledge of economic policy implications than the average Minister. Similarly, healthcare and military services tend to be entrusted to experts even when the government is paying their bills.
The corollary to that argument is that whereas politicians are at least periodically accountable to the electorate for their decisions, central bankers generally aren’t. For that reason it’s important the government has at least some oversight over the central bank to ensure that they aren’t abusing their mandate for their own ends. For this reason, it’s often considered desirable for the central bank to be given specific publicly-declared objectives to achieve: for example obliging them to attempt to keep inflation close to an agreed acceptable level.
All content is licensed under CC BY-SA 3.0.