The Autonomy of Bangladesh Bank
Also referred to as the “autonomy’ of Central Banks, the definition of independence considers two important aspects. They are political independence and economic independence (concepts elaborated later on in the chapter in relation to Bangladesh), However, nowadays these aspects have more popular names: “Goal independence”, “Target independence” and “Instrumental independence” (Label). Goal Independence: Allows the Central Bank to decide its own monetary goal and/or exchange rate system, exclusive to the direct influence of the politicians. In the case of a floating exchange rate system, the central bank solely concentrates on the monetary policy.
Some common monetary goals are maintaining price stability, controlling money apply or increasing real growth in the economy Table # 1: Types of Independence Target Independence: When the central bank is goal dependent, I. E. The state decides the macroeconomic objectives, it lets the central bank set the target value to the goal and to come up with the policy instruments with which it will achieve the target. For instance, if the state wants to keep the inflation rate at a low level of 2 percent, it will probably adopt a contractual monetary policy where the interest rate is set at a very high level Instrumental Independence: This is probably the least independent dimension among the three that we have en discussing.
The government “consults” the central bank and sets the monetary target. The Central Bank is said to be instrumentally independent as it is free to choose the policy tools to attain a macroeconomic goal. Besides that, it is both goal dependent and target dependent on the government. The instruments applied by The Oregon-Conservative Model: When modeling the independence of a central bank, the Oregon-conservative central bank model should be mentioned. In this model, the weight placed on inflation determines independence. When the central bank places a heavier weight on the inflation rate than the government, the bank is referred to as a “Oregon-conservative Central Bank:.
This exhibits both goal independence and instrument independence, because first, the bank wants to reduce the inflation rate to a level much lower than that favored by the government. Second, it can freely use desired monetary tools necessary to achieve the target inflation rate. In an alternate model, the Central banks monetary objectives are weighted against the government’s objectives. For example, if the central bank supports a real output target which is feasible with the trial rate of unemployment in the economy but lower than the target to the banks target and if no weight is placed on the government’s objectives. Conversely, the bank has no independence if the actual is heavily weighted on the government’s objectives.. 5 backed by the government.
The bank has complete independence if the actual target is closer Measuring Autonomy: There are several index and formulas derived to measure centre bank autonomy. For this paper, we can to elaborate on three specific measurements or criteria: I. It. Iii. Legal Measure by Cinema, Webb, and Naivety GMT Index by Lesion, Monomaniacs, ND Tableland Central Bank Independence and Governance (CUBIC) The Legal Measure: According to Ackerman, Webb, and Naivety (1991), the legal measure of independence of a central bank is based on four criteria. Appointment of chief executive: A bank is viewed to be more independent if the chief executive is appointed by the central bank and not the prime minister or the finance minister, and has a long term of office. II. Ill. IV.
Government involvement in policy decisions: the independence is greater as the policy decisions are made with less and less participation of the government. Goal of monetary policy: When price stability is given the maximum priority, a bank is said to have a high level of independence. Government borrowing from central bank: Finally, the level of independence is greater if more restrictions are placed on the ability of the government to borrow from the central bank. The GMT Index Messes Grill’, Monomaniacs and Tableland via their formulated index with the contributions of Ackerman (1992) divided the autonomy of Central Banks into two parts: Political Autonomy and Economic Autonomy.
Each of these was to be subdivided into multiple categories as follows: Political Autonomy Criteria: I. It. Iii. Iv. V. Vi. Vii. Viii. Appointment of the Governor of the Central Bank without any influence of the Government. Governor of the Central Bank to be appointed for tenure of more than five years. Members of the Board of Directors to be appointed without government influence. Board members to be appointed for more than five years. There are no provisions where the government decides on who represents the board. There are legal provisions aimed to protect during conflict with government. No need for to seek approval in devising monetary policy.
The charter must include provisions aimed to seek monetary policy stability as its core objectives. Economic Autonomy Criteria: I. It. Iii. Iv. V. V’. Vii. Easy credit to government at market interest rate. Credit is extended on a temporary basis. Central Bank does not participate in the primary market for public debt. There must be a limit on government borrowing from the central bank. There are no automatic procedures for the government to obtain direct credit from central bank. Central Bank sets the discount rate. Central Bank has no role to oversee the banking sector/ share this role with another organization. There are a number of criterion that must be considered to assess the degree of autonomy of any Central Bank.