It implies operational freedom.
Let us make an in-depth study of the Central Bank. After reading this article you will learn about: Role of Central Bank 2. Policy Objectives of the Central Bank 3.
Autonomy of the Central Bank. Role of Central Bank: It also seeks to promote steady growth in national output, low unemployment, and orderly financial markets.
If output is growing rapidly and inflation is rising the central bank is likely to raise interest rates, as this puts a brake on the economy and reduces inflationary pressures. If the economy is sluggish and business is languishing, an exactly opposite type of monetary action is called for. The central bank will lower interest rates — which is likely to boost aggregate demand, increase output and reduce unemployment.
The diagram shows graphically, through 5 steps, how the central bank affects economic activity. In 4 AD is changed in response to investment and other interest-sensitive components of desired expenditure.
In 5 changes in output, employment and general price level follow. It should not, however, be missed that fiscal policy also affects aggregate demand. Policy Objectives of the Central Bank: The central bank has at its disposal a number of policy instruments.
These can affect certain intermediate targets such as reserves, the money supply, and interest rates. These instruments are directed towards achieving the ultimate objectives of monetary policy — low inflation, rapid growth in output and low unemployment which are the signs of a healthy economy.
For the sake of analysis it is important to keep the different groups policy instruments, intermediate targets and ultimate objectives separate and clearly distinct. The three instruments of monetary policy are open market operations, discount rate policy and reserve-requirements policy.
The pros and cons of each will be discussed in detail in Ch. In determining its monetary policy, the central bank directly manipulates these instruments or policy variables under its control. These help determine bank reserves, the money supply and interest rates — the intermediate targets of monetary policy.
In managing money, the central bank must keep its eye on a set of variables known as intermediate targets.
These are economic variables that are intermediate in the transmission mechanism between monetary policy instruments and ultimate policy goals. When the central bank seeks to affect its ultimate objectives, it first changes one of its instruments, such as the discount rate.
This change affects an intermediate variable such as interest rates, credit availability or the money supply.Assessment of Central Bank Autonomy in the Late s.
Our snapshot of CBA in the late s is based on the results of GMT () and Cukierman. () for central banks in advanced economies, and Cukierman () for central banks in.
emerging markets and developing countries. classifications of central banks according to their autonomy. Finally, there is much empirical literature that attempts to determine whether there is an inverse relationship between central bank autonomy. tools are used by central banks, such as the Bank of England, the European Central Bank and the US Federal Reserve to control the money supply.
Explain why . Furthermore, autonomy is key to protecting central banks from possible political interference – reducing the risk of fiscal dominance, for instance. The main argument against autonomy, on the other hand, is the lack of democratic legitimacy, given that central bank governors and directors are not elected by the population (the same .
result if the central bank is cashier to the government or if it handles. the management of government debt. Policy independence refers to the maneuvering room given to the. central bank in the formulation and execution of monetary policy.
For central banks, the nomination and appointment procedures, together with appropriate safeguards against undue influence, are likely to be more important for good governance and 2 For a more detailed discussion of central bank autonomy, see .