The following set of questions deals with the structure of central banks. Briefl
ID: 1228370 • Letter: T
Question
The following set of questions deals with the structure of central banks.
Briefly list and discuss two (2) arguments to make the case for central bank independence.
Briefly list and discuss two (2) arguments to make the case against central bank independence.
Is the Federal Reserve an independent central bank? Briefly explain specific reasons to support your answer.
Answer the following three questions that relate to inflation targeting.
What do we mean by ‘inflation targeting’ in the context of Money & Banking?
Briefly list and discuss two (2) arguments to make the case for adopting inflation targeting.
Briefly list and discuss two (2) arguments to make the case against adopting inflation targeting.
Answer the following two questions:
Why might deposit insurance mechanisms (like the FDIC) encourage banks to take on too much risk? Is deposit insurance, then, a bad idea? Briefly explain.
List and fully explain three (3) of the tools available to the Fed to engage in monetary policy, as presented in class.
Use the AD-AS model to make the case for “non-activist” monetary policy when it comes restoring the economy to full employment after a negative demand shock. Important: For full credit, make sure to briefly explain in words what your graph is showing. Hint: How will the self-adjustment process happen?
Explanation / Answer
Advantages of independence of central banks are:
1) Independence might help them with political interference like government may want bank to print a lot of money if given authority which may bring a lot of monetary problems but it is prevented by independence of central banks.
2) It gives bank power to control inflation despite of the fiscal policy in place which may have different goals.
Disadvantages are:
1) The independence makes banks not empathic to need of commoners i.e. they decide interest rate, exchange rates, etc. which is numerically and empirically correct and may be against the social structure.
2) This might bring lack of cordination between fiscal and monetary policies and they might go in different directions as monetary policy is made by central bank and fiscal by government and they can have different goals in their minds.
FED is considered to be a independent central bank although fed is by the government but has authority to make policies independently. The ruling party cannot intervene in the making of monetary policies i.e. even president cannot obstruct a monetary policy implemented by fed. its cycle is different than cycle of government.