Independence of central banks: Justifications and standards

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Independence of central banks: Justifications and standards

Post  Admin on Thu Dec 27, 2018 8:36 pm

25th December, 2018 by Dr.. Haidar Hussein Al-Tohma

Many central banks have given more depth and depth to understanding the nature of the role played by the Central Bank in the economic activity of the country through its powers and the real possibilities to enable it to exercise its functions and functions to achieve the objectives of monetary policy, so we find that many countries have modified or enacted new laws Ensuring the independence of its central banks.




2- Objectives of the Central Bank

The central bank enjoys greater independence when it is mandated by law to set a set number of objectives. The attribution of a large number of functions to the central bank is attributed to the weakness of its autonomy in its management of monetary policy. On the other hand, the precise identification of the central bank's task, with emphasis and emphasis on stabilizing the internal and external value of the currency, is one of the most important indicators of the independence of this bank from the government.

3. Government representation in the administration of the Central Bank

The composition of the boards of directors of central banks has a significant impact on the nature of the relationship between banks and governments. In some cases, these councils serve as an official channel for the government to exercise its direct influence on the decisions of the central bank. In many countries, the government appoints most, if not all, members of the board of directors of the central bank. Which enables the government to exercise its influence through its direct presence in those councils. Government representatives may enjoy the rights of other members, including the right to vote on central bank decisions, giving them greater leverage in influencing bank decisions and policies.

4. The limits of the Central Bank in financing the government

Most countries have placed tight limits on government borrowing from their central banks, fearing excessive borrowing could lead to inflation. These restrictions are a general manifestation of the independence of the central bank in defining and implementing monetary policy. The Maastricht Convention of 1993 strictly forbade financing the budget deficit in Member States by resorting to borrowing from the Central Bank. The European countries that signed the Convention have, in effect, begun to amend their laws to include provisions prohibiting such borrowing.

5. Free use of monetary instruments

The inability of the central bank to use monetary policy tools it deems appropriate, without the need for government approval, weakens the independence of the central bank. The ability of the central bank to use monetary policy tools varies widely among countries. In some, the bank has great freedom to use these instruments, while others require simply changing some of them - for example, changing the requirements of the legal reserve - for example, referring to the government.

6. Financial independence of the Central Bank.

The issue of the financial independence of the Central Bank is of particular importance in studying the relationship of this bank to the government and its independence. The requirement of obtaining the prior approval of the government on the central bank's budget may in itself be an indirect means used by the government to influence the decisions of the central bank. Ability to obtain the necessary financial resources in the event of failure to follow its directions.

7. The Government's authority to appoint and remove the Central Bank's administration

In most countries of the world, the task of appointing the governor and senior officials of the Central Bank is assigned to the executive branch (the government), and this does not contradict the independence of the bank. This means that independence does not conflict with the appointment by the governments of the Governor of the Central Bank and members of the higher bodies of the Bank. 

However, in countries where central banks have a high degree of independence, government authorities are subject to restrictions and limitations in the appointment and dismissal of central bank governors, most notably:

A) The necessity of a percentage of the appointments not taken by the government, in order to limit the influence of the government in this area and prevent it from monopolizing all appointments.

B) To determine the length of stay in office so that it is relatively long compared to the electoral cycle, in order to reduce the impact of the government on the Board of Directors of the Central Bank.

(C) The approval of the Parliament (the legislature of the country) is required when the Government appoints senior officials of the Central Bank.





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