Central bank independence and the government-central bank relationship

Abstract

Central Bank independence and the coordination of central bank and government policies have advantages for both parties. On the one hand, the government can benefit from the dispassionate technical advice which a free central bank can provide on the monetary implications of proposed economic and fiscal programs of the government. Moreover, by taking appropriate monetary and credit measures, the central bank may be able to facilitate the implementation of the government's policies. The central bank can also aid the government by using its prestige as an independent institution to strengthen the position of the government vis-a-vis groups which are urging the government to take economic or fiscal actions which it considers to be unsound. On the other side, there are many circumstances in which central banks require, or at least would benefit from, complementary action by the government. It is not at all unusual to find that a given monetary policy objective can be achieved more readily if fiscal and other non-monetary measures are taken in conjunction with monetary and credit measures. In brief, monetary and credit policy can be of such assistance to governments in implementing their programs, and can be such a threat if used to obstruct or offset their economic and fiscal policies, that governments are no longer willing to permit central banks to be completely detached from their sphere of influence.