The Independence of the Chinese Central Bank
How much degree of the independence the country’s central bank has? It concerns whether the country’s monetary policy is reasonable and scientific; whether the stability of currency value is ensured; whether the country’s economy could have a healthy development. The problem of the central bank’s independence is one of the most important problems of a country’s finance and legal development.
The central bank is a special financial institution, which has the power (given by the government)of making and carrying out monetary policy, giving the national economy control and management. The central bank is the bank of government; the bank of issue; the bank of banks; the bank of controlling macro-economy. The main difference between the central bank and the commercial banks is that the purpose of the central bank is not to make a profit, the purpose of the central bank is to give the service to the aim of the country’s macro-economy.
Therefore, the problem of the central bank’s independence is how much decision-making power the central bank has in making and carrying out monetary policy, controlling and managing the finance. The degree of the central bank’s independence is determined by its legislation definition and when the central bank uses its decision-making power, the extent of the central bank is subject to the government. In a way, the problem of the central bank’s independence is the confirmation problem of the central bank’s legal status and the relationship between the central bank and the government.
Now many countries put the stability of currency value as the most important function of the central bank. During the First World War, the central bank increased the issue amount of the currency under the pressure of government for the need of finance in war. The independence of the central bank was destroyed. It leaded to the serious inflation in most countries after the First World War.
This graph below is a practice study completed by the scholar of Harvard in1990. They use national economy statistical datum from 17 countries from 1951 to 1988.
The independence of central bank Country The rate of inflation
Very high Germany Switzerland 3.1%
A little high America Holland Japan Canada 4.4%
A little low France Britain Denmark Sweden Belgium etc. 6.0%
Very low Australia New Zealand Ireland etc. 7.5%
Through the study they get the conclusion that the rate of inflation increases when the independence of the central bank decreases.
Many developed countries such as Britain, Japan and Korea enhanced the central bank’s independence after they went through a serious financial crisis. Without the independence of the central bank, the stability of monetary policy and macro-economy cannot get the guarantee. The independence of the central bank is very important.