Answer to Question #12459 in Macroeconomics for suja
goals and actions of the central bank from the government. The independence of the bank from the government can be achieved by the government's deprivation of the right to dismiss directors of the central bank, or try to force their policies. Central bank independence is welcomed by those who believe that a stable money is a boon
for the economy. The stability of the money supply can sometimes be in conflict with the objectives
of the government, especially when it seeks to increase employment in the
country or to protect a variety of vested interests. There is a belief that government succumbs to the temptation of ill-considered
policies leading to inflation as a result of attempts to increase employment or
inability to resist certain groups, who lobby government spending and tax cuts
Thus, being under the direct control of politicians the central bank is forced to conduct monetary policy leading to inflation, and unable to carry out a sufficiently tight monetary policy, preventing inflation.
It is assumed that an independent central bank is better at maintaining monetary
stability for two reasons. First, its obligation to help preserve monetary stability can be fixed by law, and
secondly, price stability is beneficial to banks, as many bank assets are
denominated in money terms. In the long term, central banks, of course, can not be completely independent from
political power, since the banking system is part of the country's political
structure. If the central bank independence is fixed by law, the law can be changed: even in
cases where the independence is guaranteed by the constitution, the constitution
may also be amended.
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