Central Bank Independence in Transition Essay

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Research using a -regression analysis of nations shows that the legal measures of the Central Bank have no relationship with inflation in developed countries, while on the other hand there is a positive relationship between inflation in developing countries and with the regulation of the bank. (Klomp; de Haan, 2010, p. 445) Some examples like Russia, Ukraine, Belarus and Moldova show that the central bank incentive approach, or the roles played by the central banks in Russia, Ukraine, Belarus and Moldova Seem to condone higher inflation rates based on fiscal pressures, and the process of their countries being globalized. Openness of the economy is a new aspect in these nations and the openness will itself reduce inflation and allow the central banks to pursue inflationary policies. And that proves that the Bank would have to play a crucial role in these countries regarding inflation policies. (Hammermann; Flanagan, 2009, p. 321)

While the independence of the bank showed a positive power in dealing with inflation, the inflation and the bank action correlation was found in some countries as in Belarus, Bulgaria and Russia. Changes in the central bank laws, it was established play a great role in the containing of inflation because of the influence the bank could have by curbing many economic variables as interest rates and dictating macroeconomic policy. This envisages a freedom that is akin to the freedom enjoyed by the Judiciary. (Maliszewski, 2000, p. 781) but this is debatable in the cases of countries where popular government does not allow the Bank to have its own way but still manages to curtail inflation.

Conclusion:

While it may not be possible to equate the Central Bank in all countries with the autonomy enjoyed by its Judiciary, it is nevertheless important that the Central bank be vested with enough authority to formulate economic policies that would have far reaching consequences in the control of inflation.Material examined so far though point out that it is ideal to have a free Central Bank, there is no conclusive evidence to show that the autonomy of the Bank is a sin qua non-for the control of inflation or for that matter any economic situation. The Central Banks independence alone may not bring down the inflation in a developing economy.

References

Bernanke, Ben S; Laubach, Thomas; Mishkin, Frederic S. 2001., Inflation targeting: lessons from the international experience. Princeton University Press.

Hammermann, Felix; Flanagan, Mark. 2009., What explains persistent inflation differentials across transition economies? Economics of Transition, 17(2), p. 297 -- 328.

Heenan, Geoffrey; Peter, Marcel; Roger, Scott. 2006., Implementing inflation targeting: institutional arrangements, target design, and communications, Issues 2006-2278. IMF Working Paper. International Monetary Fund.

Jacome, Luis Ignacio; Vazquez, Francisco F. 2005., Any link between legal central bank independence and inflation?: Evidence from Latin America and the Caribbean. Issues 2005-2075. IMF Working Paper. International Monetary Fund.

Klomp, Jeroen; de Haan, Jakob. 2010., Central bank independence and inflation revisited. Public Choice, 144(1), p. 445 -- 457.

Maliszewski, W.S. 2000., Central bank independence in transition economies, Economics of Transition. 8(1), p. 749-789.

Munoz, Sonia. 2007. Central bank quasi-fiscal losses and high inflation in Zimbabwe:

A note, Issues 2007-2008. IMF Working Paper. International Monetary Fund.

Salvatore, Dominick. 1991., National economic policies. Greenwood Publishing Group.

Schaechter, Andrea; Stone, Mark Richard; Zelmer, Mark. 2000., Adopting inflation targeting: Practical issues for emerging market countries. International Monetary Fund.

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