Analyse the economic arguments of an independent central bank Essay

Analyse the economic arguments of an independent central bank - Essay Example It must be remembered that while affecting this right to any amount of degree the State is also assuming responsibility for the value of legal tender to an equivalent extent. Maintaining internal and external value of legal tender money is a function of inflation targeting and appreciation/depreciation of currency. Whether such critical monetary policy outcomes be left independent in the hands of Central Bank professionals or be merrily dictated by elected politicians who are often not trained in such trade. We discuss this and concomitant issues in paragraphs below. The most preferred and often cited argument favoring an independent central bank is that the power to expend money should be separated or delinked substantially from the power to create money. In case these two capabilities converge we have spendthrift governments indulging in fiscal profligacy while the Central Bank simply acts as a 24/7 mint or currency printing house. State control over the ability to create money has resulted in several episodes of economic mess. Even in the days of the ancient Roman Empire the tax collection by state officers in the form of silver coins ended up being melted and corrupted with inferior metals. This gave Caesar substantial money to divert to his luxuries and such spending was a multiple time of what came in as collected tax. The result was a spiraling inflation as now more coins vied for smaller stock of market wares. In todays monetary systems running on paper, plastic and electronic money the Roman story has been repeated quite often. The Latin American inflations are fable material with inflation rates sky rocketing often to 200% or more. In some extreme cases what was affordable at twilight became unaffordable by daylight. With complex and fine lending and borrowing of money as investible funds, interest rates have turned indicators that are pliable in the hands policy makers or dictators as the case may be.Government, myopic with political