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Why should we have an independent central bank? Why can not the govt itself do the job that central bank does?

One logic people give is that governments are elected for short term and may take populist measures while central banks look at longer term stability of economy.

But even autocratic countries like Saudi Arabia have an independent central bank. It is not elected but kinda permanent . What's the reason then?

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  • $\begingroup$ Welcome to Economics:SE. Thank you for your question; please consider revising it to be more in line with our community expectations. Like many other stacks, we expect questions to provide evidence of prior research. That helps us to understand the question, and avoids our repeating work you've already done. Our help center, and other stacks provide additional resources to assist with revisions. $\endgroup$
    – 1muflon1
    Aug 5, 2021 at 11:14
  • $\begingroup$ I have searched this question on the website and even on the internet. After not finding any concrete answer I have asked this question. I respect your community standards and will surely try to improve my next questions. $\endgroup$
    – Ravi Kd
    Aug 5, 2021 at 14:54

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There are strong arguments for central bank independence from our best understanding of macroeconomics. Not only central bank independence insulates policy from the temptation to exploit political business cycles but it also protects against the temptation that government finances its spending via monetization (e.g. see discussions in Friedman 1962 or Drazen 2002). Both of the issues above can have disastrous consequences for an economy, and monetary policy is extremely important and can cause great harm if mismanaged (for example Great Recession was to great extent caused by bad monetary policy).

Second there is empirical evidence that independent central banks perform much better at their job of keeping price stability. For example, the seminal work of Cukierman (2010) and Alesina and Summers (1993) show that independent central banks perform much better than the ones that are not independent (although there is some new work that tries to challenge this, e.g. see De Haan et al 2018, it is still consensus that independent central banks perform better).

Also, as summarized in the review of literature on central bank independence by Wachtel & Blejer (2020):

In summary, CBI [central bank independence] moved to the forefront due to four factors: (1) reactions to high inflation experiences; (2) interest in central bank legislation and constitutions and the establishment of many new or reconstituted central banks; (3) developments in macroeconomics, particularly rational expectations and time inconsistency; and (4) empirical evidence. All of these combined to build a convincing case that CBI is essential to constrain political influence and provide sound monetary policy. By the turn of the century, there was a strong consensus view among economists, central bankers, and governments in support of CBI. Central bankers found that CBI gave them the ability to ignore criticism and maintain policies consistent with long‐​run objectives.

Furthermore, as further argued by Wachtel & Blejer (2020), contemporary central banks have roles that go beyond monetary policy such as conducting financial oversight or monetary research and these are also best done without political meddling (e.g. even many government run regulatory agencies (like the U.S. Securities and Exchange Commission) and research universities are independent precisely because it is recognized that political meddling in research or day to day regulation is detrimental in its own right).

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  • $\begingroup$ I get your point. However my main doubt is regarding autocratic or dictatorship countries. They don't have any political compulsions and they can order the bank to print money whenever they want. So then why they have independent central banks? $\endgroup$
    – Ravi Kd
    Aug 5, 2021 at 17:07
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    $\begingroup$ @RaviKd if a government or politicians can order central bank to conduct some policy in discretionary way (i.e. charter or mandate of central bank itself does not count), then by definition we are no longer talking about independent central bank. Central bank independence does not mean that we just have some central bank that nominally is not part of executive branch. If an dictator can order the central bank to do whatever they want then its not independent. They can call it so in same way as many $\endgroup$
    – 1muflon1
    Aug 5, 2021 at 17:20
  • $\begingroup$ dictatorships call themselves democratic, but thats just propaganda. If North Korea says its a democratic republic that does not mean its actually democratic republic. $\endgroup$
    – 1muflon1
    Aug 5, 2021 at 17:23
  • $\begingroup$ That's exactly my point. If a dictator can order the central bank it is not independent. And dictators can do that obviously. Then why do they need independent central bank. If they order then it will not be independent but as of now it is. If they want all monetary functions could have been done by the autocracy itself. Then why they created central banks. $\endgroup$
    – Ravi Kd
    Aug 5, 2021 at 17:29
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    $\begingroup$ @RaviKd what are you talking about? " If a dictator can order the central bank it is not independent. And dictators can do that obviously. Then why do they need independent central bank. " <- this is an oxymoron. If dictator orders central bank around then they do not have independent central bank, so they don't need it otherwise they would set up independent central bank, since dictators can do what they please. $\endgroup$
    – 1muflon1
    Aug 5, 2021 at 17:31

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