Time and again debates have arisen over concerns whether Turkey’s Central Bank is truly independent. So, I’ve decided to dive into the deep end of the issue of Central Bank independence in various countries and their general duties.
When defining Central Banks’ independence, a slew of terms such as “goal independence, instrument independence, institutional and financial independence” come to the fore. Goal independence of a Central Bank means that the bank can determine its own monetary policy, while instrument independence allows the bank to freely adjust its policy while fulfilling its goals.
On the other hand, corporate independence refers to the legal guarantees of central banks’ top level administrators, while financial independence can be defined as making legislations to ensure that resources funneled to the public are duly managed.
Hence, with these independences afforded to the Central Bank, it has important opportunities and free movement to regulate the economy while performing its tasks.
This independence does not mean that the bank can steer away from the government’s monetary policies while determining its goals. In other words, while the Central Bank determines the instruments it uses to reach its goals, it cannot clash with the goals set by the government. In terms of the monetary policies applied by the central bank and the fiscal policies implemented by the government to produce effective results, this unity is vital.
Traditionally, the main task of central banks is to maintain price stability. Today, in addition to ensuring price stability, we can observe that central banks also need to openly support financial stability, economic growth and as a result, employment.
In situations where price stability has to be ensured, lowering inflation in other words, central banks prioritize price stability. Furthermore, especially in developed countries with low inflation rates, central banks also contribute to financial stability. Hence, economic stability will also render great support to economic growth.
In the Central Bank law, it is stated that the bank’s main task is to ensure price stability. This law emphasizes the institution’s independence and that the bank can directly determine monetary policy to be implemented to ensure price stability and the monetary policy tools to be utilized to this end.
Furthermore, the law clearly states that that the Central Bank will support the government’s economic growth and employment policies on the condition that they do not clash with the goal of price stability.
All over the world, there are debates highlighting the goal of central banks to ensure price stability, in addition to the fact that they need to lend support to economic growth and employment. In 2008 during the global economic crisis, the opinion that central banks needed to have goals other than to ensure price stability was often articulated. To this end, it was stated that many central banks should be equipped for new objectives.
Lately, these debates have been centering around whether central banks should only be there to ensure price stability or whether they should additionally focus on economic growth and employment. It seems as though more controversy will arise regarding the expectation that central banks should focus on more than one goal.
