Research On Independence Of Central Bank

The independence of central bank is naturally formed according to the development of politics and economy in each country. In essence, the independence of central bank is tool or method to reach macroscopic economic policies efficiency which indicates the independence focuses on operating method rather than objective. This paper discusses independence of central bank systemically and analyzes development history of central bank independence in major developed countries, central bank independence theories, relationship between central bank independence and finance, institutions basics and policies regulation mechanism required in true central bank independence. And the paper does some researches in People's Bank of China independence in which for the first evaluates People's Bank of China independence all-sided by using to use Loungani and Sheets evaluation mode of central bank independence to. The paper also analyses profoundly two connected questions in promoting independence of central bank: establishment of finance security network and macroscopic economic regulating mechanism.Concretely, the first chapter discusses central bank independence development history in major developed countries. In the early 20^th century, there were only 18 central banks in the whole world, among them 16 were in Europe, other two were in Japan and Indonesia. From the late 19th century and early 20th century, quality and function of each central bank were generally developed into certain form, which made central bank theories certain and clear and were reorganized by economists and finance theorists generally. But central bank functions developed according to changes in finance system and also were influenced by different economic theory thoughts. Meanwhile, functions of central banks varied from country to country. Since 90s in the last century, the finance system assimilates each other, which is followed by the assimilation in central banks functions in the world through world's finance globalization. The world's finance and economy globalization accelerates central bank in every county develop to higher independence and diaphaneity. The development of central bank independence indicates that through the economics and finances crises in course of economy development, every country recognizes that central bank independence is the foundation to promote macroscopic economic policies efficiency, absent of which will lead to finance crises. The Federal Reserve was established as a result of Great Depression in 30s, and ten-year's economic depression made importance of central bank independence known to Japanese. And Korean government also realized the matter by experiencing Asian finance crises.In the second chapter, the paper discusses evaluation methods of central bank independence. Firstly, discusses reasons why independence of central bank will lead to relatively low inflation rate by analyzing dynamic inconsistent problem, conservative central banker methods and agency by agreement. Secondly, researches four methods of legal independence of central bank estimation: methods of Alesina (Alesina,1989)GMT(Grilli, Masciandaro&Tabellini, 1991), CWN(Cukierman webb and neyapiti,1992)and Eijffinger-Schaling(Eijffinger and Schaling, 1993a, 1993b). And in this basement, chooses modes of Loungani and Sheets which are suitable to transformation countries to evaluate People's Bank of China independence by combining its practical manipulation according to People's Bank of China law. And by transverse and longitudinal analyzes of balance sheet, this paper originally studies People's Bank of China's independence and demonstrates its deterioration trend which will be against finance stability and accelerate present inflation. In the end of this chapter, the paper discusses relations among people's bank of china independence, inflation rate and economic increasing rate.There exists a close relationship between the central bank and the ministry of finance. Chapter three examines this relationship from all angles. Since the ministry of finance best represents the government in terms of economic affairs, and the state's regulation and interference with the bank is done through the agent of ministry of finance, the relationship between central bank and the ministry of finance largely reflects the relationship between the central bank and the government. That relationship has been diminishing the independence of the central bank. The relationship between the central bank and the ministry of finance has been in an ever-changing process where economic system poses a great influence to that relationship. In the era of planned economy, due to revenue shortage, economic growth were mostly supported by bank loans, which led to the phenomenon of "a weak ministry of finance, and strong banks". Thanks to the reform-and-opening-up policy and fast and steady economic growth, the relationship between the central bank and the ministry of finance tends to be more and more rationalized. The independence of the central bank has been strengthened ever since the enactment of Law on the People's Bank in 1995.Generally, the evolution of the relationship between the central bank and the ministry of finance can be divided into the following three stages: (i)prior to the reform-and-opening-up program, the People's Bank (of China) was just a subordinate organ; (ii)the functions of People's Bank and those of the ministry of finance were not well defined until 1995; (iii) the year of 1995 witnessed the relationship entering into a new stage of development and ever since then the relationship has stayed in that new track. Along with a functional switch of finance to public finance and with big fiscal revenue growth, the independence of the China's central bank has been accordingly strengthened. This chapter evaluates the relationship in different time periods between the central bank and the ministry of finance.One of the fundamental functions of the central bank is to function as the ultimate lender. As the ultimate lender, the central bank financially supports other financial institutions by making loans to them, which is of great significance to the steady development of the finance system.Chapter four observes the practice of People's Bank of China as the ultimate lender from an empirical perspective. The People's Bank issues loans to repay debts of bankrupt financial institutions or financial institutions having been ordered to be dissolved, but that is beyond the magic a ultimate lender is supposed to make.Chapter Five illustrates the relationship between monetary policy objective, the effectiveness thereof and the independence of the central bank. The amount of currency supply as a tool of monetary policy functions less and less effectively, but it takes time to transform the monetary policy objective into inflation objective. Promotion of the independence of the central bank, among other things, poses a major premise to that transformation.Chapter Six explores the relationship between the independence of the central bank and the coordinate mechanism of macro control. The independence of the central bank itself is not a sought goal; instead, the objective aims at the enhancement of efficiency and effectiveness of macro economic policies. The said efficiency and effectiveness can be largely attributed to a balance between independence of the central bank and the coordinate mechanism of macro economic policies. It can be said to some extent that a well-intended coordinate mechanism of macro economic policies is prerequisite for the independence of the central bank. The deep-rooted problems existing in China's macro economy mainly include: unbalanced economic growth, costly and inefficient growth model, government-oriented economic operation, unreasonable economic structure and industrial structure, and etc. Macro control should attach more attention to the coordination between monetary policy and finance policy. Absent effective macro control mechanism, independence of the central bank alone is unable to cast influence over market expectation, which renders that independence meaningless.Chapter seven summarizes this paper and proposes four approaches to the promotion of the independence of China's central bank, namely, the central bank being a legally independent entity, the central bank being independent regarding human resources, the central bank functioning independently and the center bank being independent in making budgets.