Central Bank Independence, Political Influence and Macroeconomic Performance: A Survey of Recent Developments

Monetary policy usually enables policymakers to quickly but temporarily achieve various real goals like high employment, financing of the budget deficit, attainment of balance of payments objectives and low interest rates. In the process, high-powered money is increased fueling inflation. To offset this policy bias, various institutional mechanisms that reduce the ability of governments to freely expand the money supply have been tried. Among them, an important device, which is gaining popularity recently, is the granting of sufficient independence to the Central Bank in conjunction with an unequivocal mandate to focus on the attainment of price stability.This paper surveys alternative ways to characterize independence and also can be considered as validating the more general proposition that the design of policymaking institution matters.