Home
Independence of central banks: Justifications and standards
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.
Justifications for the independence of central banks
Economic literature is rich in many studies that have been subjected to research and analysis of the content and importance of the independence of the Central Bank and its role in establishing the foundations of growth and economic and monetary stability. Most of these studies have revealed that central banks, which are more independent of the executive branch in general and of the financial authority in particular, will produce better monetary policy and stronger and longer-term economic stability. In this regard, the trend of supporters of the independence of the Central Bank of the number of arguments, the most prominent (1):
1. Monetary affairs should be kept away from the influence of politicians, since members of the government and parliament give priority to the satisfaction of their constituents. They adopt policies consistent with their political and electoral interests (including putting the bank under political pressure for expansionary monetary policy ahead of elections) So these matters should be assigned to a central bank independent of the government.
2. The ability of the central bank to achieve and maintain long-term stability of prices will improve if monetary policy formulation by officials away from politics can look at the long term.
3 - If the Central Bank is independent, the policy followed in this case will lead to lower inflation and stability of price levels. This understanding was based on several studies that examined the relationship between the degree of independence of central banks and inflation and ended up with an inverse relationship between them, especially in developed countries. In other words, the higher the degree of independence of the central bank, the lower the inflation rate, That providing a higher degree of independence to the central bank helps to reduce the burden of inflation and increase the credibility of monetary policy.
4. Central banks with high degree of independence can resist government requests to finance the budget deficit either by issuing more money or by holding public debt securities. More precisely, the central bank's independence from the government in this context means that the latter can not force the central bank to finance the budget deficit.
5. The Central Bank shall be responsible for monitoring and directing the financial system of the State, as well as finding the required coordination between its various institutions, which requires the Central Bank to enjoy independence.
6. The independence of the Central Bank will lead to the removal of the effects of the government from these banks in terms of determining their expenditures and revenues, and then separating the budget of the Central Bank from the state budget.
7. The increasing globalization of financial markets coupled with recurrent financial crises calls for the independence of the central bank in addressing these crises through the use of appropriate monetary instruments.
Thus, the independent central bank can resist the pressures of financial and political power and then adopt a prudent monetary policy that is in the public interest, represented by better macro economic performance, greater productivity and greater use.
Standards of independence of central banks
Studies on the independence of central banks face considerable difficulty, especially in measuring the degree of independence, since the latter are inherently not quantifiable for their factors, including valuative and relative provisions. However, most studies on the independence of the Central Bank agreed on a set of criteria On the basis of which the extent of such independence is determined. 2 The most prominent of these criteria are:
1. Drawing monetary policy
The authority responsible for setting and defining the monetary policy varies according to the degree of independence enjoyed by the central bank. The independent central bank has the powers to determine and determine the monetary policy under the mandate freely granted to it by the law without receiving any instructions or directives from the government. While in other cases monetary policy is the responsibility of the Government, where the latter is responsible for its reports and objectives.
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.
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
[You must be registered and logged in to see this link.]
[/size]
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.
Justifications for the independence of central banks
Economic literature is rich in many studies that have been subjected to research and analysis of the content and importance of the independence of the Central Bank and its role in establishing the foundations of growth and economic and monetary stability. Most of these studies have revealed that central banks, which are more independent of the executive branch in general and of the financial authority in particular, will produce better monetary policy and stronger and longer-term economic stability. In this regard, the trend of supporters of the independence of the Central Bank of the number of arguments, the most prominent (1):
1. Monetary affairs should be kept away from the influence of politicians, since members of the government and parliament give priority to the satisfaction of their constituents. They adopt policies consistent with their political and electoral interests (including putting the bank under political pressure for expansionary monetary policy ahead of elections) So these matters should be assigned to a central bank independent of the government.
2. The ability of the central bank to achieve and maintain long-term stability of prices will improve if monetary policy formulation by officials away from politics can look at the long term.
3 - If the Central Bank is independent, the policy followed in this case will lead to lower inflation and stability of price levels. This understanding was based on several studies that examined the relationship between the degree of independence of central banks and inflation and ended up with an inverse relationship between them, especially in developed countries. In other words, the higher the degree of independence of the central bank, the lower the inflation rate, That providing a higher degree of independence to the central bank helps to reduce the burden of inflation and increase the credibility of monetary policy.
4. Central banks with high degree of independence can resist government requests to finance the budget deficit either by issuing more money or by holding public debt securities. More precisely, the central bank's independence from the government in this context means that the latter can not force the central bank to finance the budget deficit.
5. The Central Bank shall be responsible for monitoring and directing the financial system of the State, as well as finding the required coordination between its various institutions, which requires the Central Bank to enjoy independence.
6. The independence of the Central Bank will lead to the removal of the effects of the government from these banks in terms of determining their expenditures and revenues, and then separating the budget of the Central Bank from the state budget.
7. The increasing globalization of financial markets coupled with recurrent financial crises calls for the independence of the central bank in addressing these crises through the use of appropriate monetary instruments.
Thus, the independent central bank can resist the pressures of financial and political power and then adopt a prudent monetary policy that is in the public interest, represented by better macro economic performance, greater productivity and greater use.
Standards of independence of central banks
Studies on the independence of central banks face considerable difficulty, especially in measuring the degree of independence, since the latter are inherently not quantifiable for their factors, including valuative and relative provisions. However, most studies on the independence of the Central Bank agreed on a set of criteria On the basis of which the extent of such independence is determined. 2 The most prominent of these criteria are:
1. Drawing monetary policy
The authority responsible for setting and defining the monetary policy varies according to the degree of independence enjoyed by the central bank. The independent central bank has the powers to determine and determine the monetary policy under the mandate freely granted to it by the law without receiving any instructions or directives from the government. While in other cases monetary policy is the responsibility of the Government, where the latter is responsible for its reports and objectives.
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.
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
[You must be registered and logged in to see this link.]
[/size]
» utube 5/9/24 MM&C 0:02 / 46:46 PM - Al-Sudani - Golden Opportunity - Private Sector - Contra
» utube MM&C 5/11/24 Iraqi Dinar - IQD Update - International - IraqTiming - 2024 Budget Schedule - Sp
» Bahr Al-Ulum calls for legislating the renewable energy law and localizing the solar panel industry
» In numbers: the rise in internal debt in Iraq
» Jordan demands that Iraq continue to export oil for another three months
» Iraq is the largest producer.. OPEC+ is pumping higher than scheduled and in anticipation of the Jun
» Close to the coordination framework: There is no intention to change the internal regulations of Par
» Central Bank sales exceed $274 million today
» But the representative of the exchange companies is pessimistic... Why did the dollar fall?... The C
» Jordan addresses Iraq to extend a memorandum of understanding to purchase oil
» Bribes increased from 3,000 to 50,000 dollars.. What is the condition of alcohol in Iraq after the p
» Presence movement: Sunnis and Kurds while the Americans remain in Iraq
» A deputy reveals the contents of the first water strategy in Iraq
» Soon...the second reading of the proposed red card law
» The discovery of 10 new oil and gas fields in the Anbar desert
» A bloc announces to “Al-Ma’louma” the date of the parliamentary speaker’s election session
» Parliamentary Finance explains the mechanism for amending the retirement law
» Sovereignty accuses Al-Halbousi of obstructing the election of a Speaker of Parliament
» Parliamentary Agriculture accuses Kurdistan of harming the farmers of the center and south
» Al-Sudani confirms Iraq's readiness to host the Arab Network conference
» Nechirvan Barzani calls on the Iraqi government to allocate a budget to confront climate change
» “Iraq is in danger.” Political warnings against ending the work of the UN mission
» The Iraqi Interior Minister announces the signing of a security cooperation memorandum with Syria
» The Minister of Oil told “Al-Iqtisad News”: The 5th and 6th rounds will add 3 Mqmq of gas to Iraq’s
» Economist: Tax revenues from the private sector should be 4 trillion dinars annually
» The Real Estate Bank calls on the Iraqi Central Bank to determine a plan to allocate a new initiativ
» More than one billion and 400 million dollars...CBI sales within a week
» Oil: Iraq achieved self-sufficiency in liquid gas and began exporting the surplus
» Iraq begins exporting liquid gas
» The Cabinet Secretariat sets to Al-Iqtisad News the completion date for the Chinese agreement school
» Securities: The most recent law of the Authority in the Arab and regional countries
» A European desire to strengthen security and economic cooperation with Baghdad
» The close selection of a person for the position of Speaker of Parliament
» Parliamentary law excludes the exchange of penalties for cash amounts
» An agreement with Italy to finance industrial projects
» The Najaf Chamber of Commerce signs a “memorandum of understanding” with its Thai counterpart
» Baghdad, Arab Forum
» Specialists: Economic integration and job opportunities await development
» The President of the Republic, Nechirvan and Barzani stress the necessity of coordinating efforts be
» The Judicial Institute announces the names of those accepted for the 48th and 49th sessions
» Today's newspapers are interested in launching the fifth licensing supplement rounds and the sixth l
» Al-Sudani receives the Secretary-General of the Arab Network for National Human Rights Institutions
» Trade participates in the meetings of the Economic and Social Council at the level of senior officia
» The Minister of Transport discusses with the Tunisian Minister of Foreign Affairs and Immigration wa
» Iraq recorded an increase in its oil exports to the United States last week
» It is governed by three dimensions.. Parliament talks about a strategic priority for Iraqi national
» To what extent do Arab countries influence politically Iraq? It has become more independent
» The Iranian ambassador in Baghdad: Iraq has paid its debts, and the security agreement includes thre
» Dollar exchange rates decline slightly on the Baghdad Stock Exchange
» China has 18% of the fields in the two new rounds, and 11 countries share the remainder
» On the table...a proposal for the Kurdistan oil crisis and an effort to conclude a similar agreement
» Al-Awadi: A government decision to provide sovereign guarantees and guarantees to encourage the inve
» 6 Chinese companies are among the winners of developing Iraqi oil and gas fields
» Baghdad gives UNAMI the end of 2025 to leave the country after fiery briefings
» Dhi Qar clarifies: The quarry burying radioactive materials is regular and does not pose a danger
» Al-Sudani: There are 64 lagging projects in Babylon
» The housing crisis is expanding and planning confirms: Iraq needs 3 million housing units to solve i
» 90 billion dinars were recovered from social protection violators
» Iraq seeks to increase its oil reserves to more than 160 billion barrels
» After keeping the numbers secret... Did the rain increase Iraq's water reserves by 120%?
» In the first quarter of 2024.. Iran will displace Iraq and become the second largest producer in OPE
» Iraqi oil exports to Jordan stopped 20 days ago
» Iraq and Syria sign a memorandum of security cooperation in several fields
» Parliament recommends stopping electronic schools in Iraq
» Parliamentary law rules out passing a law replacing penalties with sums of money
» After a rare meeting... sources talk about Al-Sadr's future in political life in Iraq
» The President of the Republic warns of climate change and its threat to food security and future gen
» The Iranian ambassador to Iraq talks about negotiations for the withdrawal of American forces and Tu
» Deputy: Iraq represents an important factor in the stability of the global oil market
» Transportation: The Iraqi-Turkish technical committees continue to fulfill the requirements for impl
» Economic: Raising the interest rate will reduce real estate prices
» Did Barzani agree in Tehran to end the presence of Iranian groups in Kurdistan? - urgent
» Al-Sudani: We are establishing a new situation for the global energy market through the Development
» Al-Sudani: The government program devoted a wide scope to the government’s vision for oil and gas in
» Al-Awadi: Ending the work of the UNAMI mission is consistent with the government’s vision in this fi
» MM&C Floating the dinar" returns to the forefront.. Will the Central Bank of Iraq resort to it and w
» The Secretary of the Ministry of Defense meets with the Commander of the NATO mission
» Expert: The stability of the economy is linked to the political situation
» A parliamentary request to lift the injustice against 20,000 Iraqi employees
» Parliamentary Finance criticizes the government's failure to send the budget schedules
» Minister of Oil: The 5th and 6th licensing rounds will take place within the framework of exploratio
» Al-Sudani: Iraq is a difficult number in the global market in the field of energy
» Al-Khanjar rejects Al-Halbousi’s request to head Parliament
» Revealing the date of the arrival of the 2024 budget schedules
» Al-Halbousi nominates Talal Al-Zubaie for presidency of the House of Representatives
» "A coup in Iraqi universities"... Replacement of presidents and deans under the new education law
» Al-Sudani: Iraq is a difficult number in the equation of energy and oil wealth in the region and the
» Minister of Oil: We hope to announce an increase in Iraq’s oil reserves to 160 billion barrels
» Iraq's mass graves...stories that did not end with the burial of their owners, and the "legacy of IS
» Pictures: New licenses in Iraq to extract “huge” quantities of oil and gas
» Transport reopens the Baghdad - Samarra railway line
» Al-Awadi: A government decision to provide sovereign guarantees and guarantees to encourage the inve
» Oil clarifies the mechanism for investing grant funds and licensing contracts
» A $700 million agreement is signed between Iraq and Italy to finance these projects
» Iraq recovers 90 billion dinars from social protection violators
» Sudanese officially launches the two licensing rounds and sets the date for stopping gas burning
» An economic vision for the standard of competition for exploratory plots in Iraq
» The Iraqi Islamic Bank announces an increase in its capital to 300 billion dinars