Theories Of Central Bank Independence And Their Application In China

Since the end of 1980s, the tendency of central bank independence had emerged in the world, including both industrialized and developing countries, and those in economic transition, which, consequently, drew the attention and interest of both the academics and policy makers.This paper, firstly, starts with the definition of central bank independence with respect to personnel, financial and policy independence, and points out this definition is in relative terms. Then, this paper presents the theoretical considerations on the relations between central bank independence and several economic factors, i.e., inflation and its variability, economic growth and its variability. Besides, measures of central bank independence, including the legal ones (Alesina, GMT, LS, Eijffinger-Schaling, Cukierman Measures) and non-legal ones (the turnover of central-bank governors, political vulnerability of the central bank), and comparison and comments regarding those measures, are also presented in detail, with empirical studies on the link between central bank independence and economic performance being carefully reviewed. In general, empirical studies support theoretical analysis, that is, the more independent the central bank is, the lower inflation rate is in that economy; and there is no significant negative relation between central-bank independence (or inflation) and economic growth (or unemployment rate); at least, no evidence shows that inflation contributes to economic growth, and most scholars find no relation between central-bank independence and economic growth variability. Finally, this paper presents the independent process of China's central bank, the PBC (the People's Bank of China), in terms of personnel, finance, policy, function and central banker's background, which indicates that all important reforms involving central bank in China after her economic reform and opening up to outside, have been following how to reinforce the central bank independence. Then, it measures the PBC's degree of independence by applying GMT indices, analyses the problems facing PBC's independence and their consequences, and points out the urgency regarding establishing a real independent central bank in China. Finally, policy implications are put forward to rebuild the relations between the State Council and PBC, and reinforce the decision-making function of Monetary Policy Committee.