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Article
Affiliation(s)

Budapest Business School—University of Applied Sciences, Budapest, Hungary

ABSTRACT

According to the consensus view, central banks reached a high level of independence by the end of last     century. This paper argues that as a result short-term political considerations applied during the appointment process of central bank decision-makers, their actual independence was at a lower level already that time.      The global financial crisis created new tasks for central banks and forced a review of the meaning of independence. The paper argues that central banks should be responsible for safeguarding financial stability and their macro-prudential activity can only be executed in cooperation with governments. However, interest rate policy decisions must remain free of political influence. The novelty of this paper lies in showing the conflictual relationship of the various roles of central banks. The paper concludes that the duality of independence and cooperation represents a major uncertainty in the operation of central banks. As a result of the greater degree of politicisation of the activities of central banks, their de facto independence in interest rate policy making may further shrink in the future. The paper also shows that India represents a unique case of central bank independence. In most countries, de jure independence is higher than de facto. India is one of the very rare countries where the reverse is the case.

KEYWORDS

central bank, independence, macroprudential policies, financial stability, government policies

Cite this paper

Economics World, Mar.-Apr. 2018, Vol. 6, No. 2, 81-97 doi: 10.17265/2328-7144/2018.02.001

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