Central bank independence

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Octavian Armasu, NBM gorvernor, whose dismissal in 2023 raised concerns over central bank independence in Moldova Armasu, Twinning.jpg
Octavian Armașu, NBM gorvernor, whose dismissal in 2023 raised concerns over central bank independence in Moldova

Central bank independence refers to the degree of autonomy and freedom a central bank has in conducting its monetary policy and managing the financial system and inflation targeting. The purpose of central bank independence is to maintain price stability, enhance the effectiveness of monetary policy, and ensure the stability of the financial system. Independent central banks have more credible and effective commitments to price stability. [4] It is a key aspect of modern central banking, and has its roots in the recognition that monetary policy decisions should be based on the best interests of the economy as a whole, rather than being influenced by short-term political considerations. [5]

Contents

History

Early concepts (1920s)

The concept of central bank independence emerged in the 1920s [6] [7] following the economic disruptions of World War I. [8] The Brussels International Financial Conference (1920) was instrumental in establishing the theoretical framework for independent central banking, [9] recognizing that monetary authorities needed autonomy to maintain financial stability. [10]

Post-World War II era

The 1951 Accord between the Federal Reserve and the United States Department of the Treasury marked a significant policy shift. [11] This agreement formally granted the Federal Reserve independence from the Treasury Department, [12] allowing it to pursue monetary policy objectives without direct government interference. [13]

Modern era (1980s-present)

Since the 1980s, there has been a substantial increase in central bank independence worldwide. [7] This movement was driven by experiences with high inflation in the 1970s [14] and a growing academic consensus on the benefits of independent monetary policy until the 2008 financial crisis. [15] Many countries reformed their central banking laws to enhance institutional independence and establish clear mandates focused on price stability. [16]

Types

Central bank independence can be classified in various ways. One common classification is based on the extent of the central bank's autonomy, which can be either formal or actual. Formal independence refers to the legal provisions that guarantee the central bank's autonomy, such as its mandate, its organisational structure, and the procedures for appointing its leaders. Actual independence refers to the practical independence that the central bank enjoys in practice, taking into account factors such as its political and institutional environment, its relationship with the government, and the level of transparency and accountability in its operations. [17]

Another common classification of central bank independence is based on the extent to which the central bank is free from government control. This can be either formal or actual, and ranges from complete independence to full government control, with several intermediate levels in between. [18] The People's Bank of China is an example of a central bank subject to Chinese Communist Party control (Unified power). [19]

On 15 July 2025, Donald Trump reportedly penned a letter to dismiss Powell as Fed Chair. [20] However, Trump later denied those reports to reporters at the White House. [21]

See also

References

  1. ↑ Report from the Commission to the European Parliament and the Council on the implementation of macro-financial assistance to third countries in 2023. 2024. p. 5.
  2. ↑ https://enlargement.ec.europa.eu/document/download/858717b3-f8ef-4514-89fe-54a6aa15ef69_en?filename=Moldova%20Report%202024.pdf page 49 "However, the abrupt dismissal of the governor of the National Bank of Moldova in December 2023 raised concerns regarding good economic governance and the independence of the central bank. The dismissal was conducted in line with Moldovan law, though this falls short of international best practice."
  3. ↑ International Monetary Fund (2024). Country reports: Republic of Moldova . p. 6. ISBN 9798400297151.
  4. ↑ Herrmann, Heinz (2 June 2009). Monetary Policy Over Fifty Years: Experiences and Lessons. Routledge. ISBN   978-1-134-02083-6.
  5. ↑ "Central Bank Accountability, Independence, and Transparency". IMF. 25 November 2019. Retrieved 13 February 2023.
  6. ↑ do Vale, Adriano (3 September 2021). "Central bank independence, a not so new idea in the history of economic thought: a doctrine in the 1920s" . The European Journal of the History of Economic Thought. 28 (5): 811–843. doi:10.1080/09672567.2021.1908393. ISSN   0967-2567.
  7. 1 2 Dincer, Nergiz; Eichengreen, Barry; Martinez, Joan J. (2024). "Central Bank Independence: Views from History and Machine Learning" . Annual Review of Economics. doi: 10.1146/annurev-economics-081623-032553 . ISSN   1941-1383.
  8. ↑ Baumgarten, Matthias (February 2012). The Role of Central Bank Independence in a World of Capital Mobility. GRIN Verlag. ISBN   978-3-656-11414-7.
  9. ↑ Knill, Christoph (31 October 2013). Cross-national Policy Convergence: Concepts, Causes and Empirical Findings. Routledge. ISBN   978-1-317-98356-9.
  10. ↑ Singleton, John (25 March 2016). Economic and Natural Disasters since 1900: A Comparative History. Edward Elgar Publishing. ISBN   978-1-78254-735-8.
  11. ↑ Huret, Romain; Lichtenstein, Nelson; Vinel, Jean-Christian (11 December 2020). Capitalism Contested: The New Deal and Its Legacies. University of Pennsylvania Press. ISBN   978-0-8122-9762-1.
  12. ↑ Chaudhuri, Ranajoy Ray (15 October 2016). The Changing Face of American Banking: Deregulation, Reregulation, and the Global Financial System. Springer. ISBN   978-1-137-36121-9.
  13. ↑ Kwarteng, Kwasi (27 May 2014). War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt. PublicAffairs. ISBN   978-1-61039-196-2.
  14. ↑ James, Harold (19 November 2012). Making the European Monetary Union. Harvard University Press. ISBN   978-0-674-06808-7.
  15. ↑ Conti-Brown, Peter (10 October 2017). The Power and Independence of the Federal Reserve. Princeton University Press. ISBN   978-0-691-17838-7.
  16. ↑ Warjiyo, Perry; Juhro, Solikin M. (25 July 2019). Central Bank Policy: Theory and Practice. Emerald Group Publishing. ISBN   978-1-78973-753-0.
  17. ↑ Central Bank Independence, Accountability, and Transparency. 15 July 2009. doi:10.5089/9780230201071.071. ISBN   9780230201071.
  18. ↑ Gersbach, Hans; Hahn, Volker (August 2009). "Voting Transparency in a Monetary Union" . Journal of Money, Credit and Banking. 41 (5): 831–853. doi:10.1111/j.1538-4616.2009.00235.x.
  19. ↑ Wei, Lingling (8 December 2021). "Beijing Reins In China's Central Bank" . The Wall Street Journal . ISSN   0099-9660 . Retrieved 31 August 2023. Beijing has little tolerance for any talk of central-bank independence; the monetary authority, just like any other part of the government, answers to the party.
  20. ↑ Haberman, Maggie (16 July 2025). "Trump Has Drafted Letter to Fire Fed Chair and Asked Republicans if He Should". The New York Times.
  21. ↑ Schwartz, Brian (16 July 2025). "Trump Denies He Is Planning to Attempt to Fire Powell". Wall Street Journal. Retrieved 16 July 2025.
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