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Independent Bank Essay

1891 words - 8 pages

The first central bank has run since 17th century and it made lots of advantage in country’s economics. However nowadays, there are some type of central bank, each type of central bank having both advantage and disadvantage for example: independent central bank, dependent central bank, and half-independent central bank.in other ways. Based on their government type, a central bank was chosen suitable for purpose of country. All kind of central bank must control the money supply as managing the interest rate, lender of last resort for commercial bank and reserve requirement and also prevent bank run as well as bad activity or lack of responsible of financial institution of each country. In this paper we will discuss on what an independent central bank is and how independent bank can affect the policy outcome.
Firstly, we should what is the definition of independent, central bank and how to measure the independence of central bank. An independent bank is free to bring out the monetary policy without intervening of government (Howells). For more detail, there are some types of independent: independent in goal, operation, legal and management, but independent in goal and operation are the most important. Independent in goal, central bank has authority for setting its own goal, which is inflation target, money supply as well as balances the fixed exchange rate. In other side, independent in operation, central bank can chose which instrument is suitable for them to reaching the inflation target. In this essay I will concern about two type of independent central bank: half-independent central bank and full independent central bank.
A half independent central bank is which government set the goal for economy, then the central bank just only deicide which instrument should they used. A typical example of half-independent bank is bank of England. The government of England set inflation target after balanced benefit between unemployment rate and inflation. Bank of England only can decide what instrument that they want to used. To more illustrated, two main goal which government set up for bank of England are monetary stability and financial stability (Annual Report 2013 - The Bank’s strategic priorities in 2013/14, 2013) . Furthermore, central bank of England set some strategy for the former goal of government is: restraining the inflation under government 2% target by reaction effectively and decisively to reduce risk from crisis by European debt in order to guarantee the inflation target of Her Majesty’s Government, promote the macroeconomic by raising bank’s understanding, calculating the impact of unconventional monetary policy as well as balanced between monetary policy and macro policy (between unemployment and inflation rate) (Annual Report 2013 - The Bank’s strategic priorities in 2013/14, 2013). The later gold for them is financial stability so they making up 4 main strategy to achieving the second target are: maintaining the stability and promote...

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