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19 March, 2022

Central Bank Autonomy

 Central bank autonomy refers to the extent to which the central bank carries out these functions independent of executive and legislative control. In recent years, central bank autonomy has assumed growing empirical and analytical significance. On the one hand, the number of countries undertaking central bank reform has gradually increased over the last two decades, escalating dramatically in the early 1990s. On the other hand, this more visible and powerful role for the central bank has been accompanied by a large literature in both economics and political science as to the causes and consequences of autonomy. A central bank must have clearly defined and prioritized objectives, sufficient authority to achieve these objectives and be autonomous to remain credible. At the same time, it must be accountable for the authority delegated to it to ensure  checks and balances. Reforming the legislative framework for a central bank—often after a crisis—can help boost the credibility of monetary policy.

 The four main principles of any legal framework for CBA include: 1. Setting price stability as the primary objective of monetary policy 2. Curtailing direct lending to governments 3. Ensuring full autonomy for setting the policy rate 4. Ensuring no government involvement in policy formulation.