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Central Bank Independence and Inflation Targeting - Essay Example

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From this paper, it is clear that the central bank of a country is arguably the most powerful economic institution holding the power and ability to exert its influence in directing the economy of the nation with readiness and in consonance with the changing economic conditions…
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Central Bank Independence and Inflation Targeting
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Download file to see previous pages The main cause for this lay in the fact that the general rise in the variability as well as the general level of inflation, which largely depended on the increase in the oil prices, led to large concerns regarding the efficacy of the Central banks in fulfilling its commitment of controlling such inflationary tendencies (Posen, 1998). There was significant consensus on the opinion that central banks most of the larger economies had faced some incentives which had the capability of inherently leading to an ‘inflationary bias,’ and this bias had resulted in the high inflationary tendencies prevalent during the 1970s (Alesina & Summers, 1993). In essence, the changes in the inflationary tendencies to higher levels needed a plausible explanation and many economists and policymakers considered the inflationary bias theory as the fitting cause to lead to the high inflation phenomenon (Blinder, 1998). Therefore it became necessary that a solution to the problem was to be found. The possible solutions ranged from the establishing central banks as independent monitory entities and enhanced adherence to ‘rules’ of the monetary policies as well as with preset ‘inflation targets’. This has seriously activated the creation of various economic literature and had caused varied discussions particularly in debates regarding monetary policy since the days of the great depression up to the present day economic environment (Eijffinger & Haan, 1996). This has led to dimensional changes to the legislation covering the role of central banks in many countries. However, the central underlying principle was to provide increased autonomy and accompanying accountability to the central banks with a view to enable the design and execute monetary policies that have the effect of attaining stability in prices (Gavin, 2003). Thus what emerges is the fact that the central bank independence coupled with inflation targeting is one of the necessities for formulating better policies for long-run price stability as well as the containment of inflationary tendencies in the short run. Empirical studies have proved that there is evidence a positive association between the central bank independence along with inflation targeting and the actual control over the inflation rates. ...Download file to see next pagesRead More
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