Central bank independence refers to the degree of autonomy and freedom a

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

has in conducting its

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

and managing the

financial system A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of comple ...

. 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. The concept of central bank independence emerged in the 1920s and was broadly approved by the conclusions of the Brussels International Financial Conference (1920). Since the 1980s, there has been a substantial increase in central bank independence worldwide. The purpose of central bank independence is to enhance the effectiveness of monetary policy and ensure the stability of the financial system. Independent central banks are better able to carry out their mandates, which include maintaining price stability, ensuring the stability of the financial system, and implementing monetary policy. By being free from political influence, central banks can focus on long-term goals, such as controlling inflation and ensuring stability, rather than responding to short-term political pressures. 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 organizational 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 ethics and governance, accountability is equated with answerability, culpability, liability, and the expectation of account-giving. As in an aspect of governance, it has been central to discussions related to problems in the public secto ...

in its operations. 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 significant government control, with several intermediate levels in between. The People's Bank of China is an example of a central bank subject to

Chinese Communist Party The Communist Party of China (CPC), also translated into English as Chinese Communist Party (CCP), is the founding and One-party state, sole ruling party of the People's Republic of China (PRC). Founded in 1921, the CCP emerged victorious in the ...

control.

References

{{Central banks Macroeconomics Economic policy Banking Operations of central banks

See also

References