Central bank independence and economic performance Assignment

Central bank independence and economic performance - Assignment Example For instance under the floating exchange rate regime, protecting the value of the domestic currency against US Dollar and other international currencies calls for vigilance and continuous monitoring of the world economy through various economic indices. Regulating money supply and interest rates are governed by several domestic and international factors as well. Therefore, independence of the central bank is necessary to deal with these problems effectively without any interference in the regulatory process. However, the level of independence varies from country to country based on the political and economic system prevailing in the countries. Long ago in 1929 Montagu Norman, Governor of the Bank of England wrote: â€Å"I look upon the Bank as having the unique right to offer advice and to press such advice even to the point of nagging: but always, of course, subject to the supreme authority of the government† (Toniolo, G. 1988 p. 47). This statement underlines the need for in dependence as well as its limitation. The role of central bank Central bank’s monetary policies have different impact on different economic variables of the economy. Increase in money supply with or without decrease in interest rates could trigger inflation in the economy. Therefore, careful analysis of the economic indicators is important in taking appropriate action by the central bank. For instance, inflation in this case could affect consumption thereby demand for the products. At the same time, this could increase capital investment and results in employment generation. Stability in exchange rate is another important factor which could affect inflation in the country and foreign direct investments in the country which will have...This paper offers a comprehensive analysis of the role of central bank in terms of economic performance of the nation. Influence of the political independence of central bank operations in context of achieving its objectives is under review. In order to achieve economic growth in a country, formation of capital is essential for fresh investments in the economy. Increase in aggregate demand in the country is an important factor in this regard for attracting investment of capital in new projects. Liquidity in the system as well as interest rates should be monitored and regulated on a continuous basis by the central bank to provide good environment for capital investment and consumption which in turn will generate demand for the products. However, the central bank should also ensure that it does not result in overheating of the economy. Regulating interests and money supply in the economic system is very complicated in the backdrop of technological developments taking place in the world and globalisation of economies. The independence of the central bank of the county is very important for exercising control over the commercial banks in the country through its monetary policies. The monetary policies need to be complementary to the fiscal policies of the government to achieve its economic objectives. A country with high central bank interference need to introduce reforms to make the institution more independent within the timeframe set for this purpose to improve stability in liquidity and prices.