Discuss by collecting and analyzing historical data and by giving Essay - 1

Discuss by collecting and analyzing historical data and by giving up-to-date real life example(s) from the American, UK or Europ - Essay Example The large scale of these interferences has brought intense public inspection of the Federal Reserve's institutional and power structure. Particularly, many have questioned why the Fed has the liberty to engage in such proceedings without the explicit approval from president or the Congress. This political interruption of independence is generally referred to as the independence of central bank. This essay focuses on assessing why Congress made the Fed’s independent when it created it in 1913. The important point to remember is that giving the central bank independence is the greatest way for governments to tie their own hands and put an end to them from misusing economic policies for temporary political causes. In the year of 1913, Congress purposefully formed the Federal Reserve as an independent and self-governing central bank, which formed a fundamental tension: how to guarantee that the Fed remains answerable to the voters without losing its independence. Over the years, t here have been various changes in the structure of Fed to improve its credibility, independence, answerability, and transparency. These changes have guided to a healthier institutional design that ultimately renders policy believable and based on sound financial reasoning, as against politics. In times of economic and financial crisis, there is a comprehensible tendency to reexamine the structure and formation of the Federal Reserve System. A central bank's independence, on the other hand, is the key tool to guarantee a government not misusing monetary strategy for short-term political reasons. In a currently well-known article that was published in the year of 1993, Summers and Alesina found that developed (advanced) nations with high levels of central bank independence also practiced lower average levels of inflation rate from the period of 1955-1988 (Farlex 2013: 1). Figure 1 reprints the chart from their essay, which clearly demonstrates this negative relation. Central Bank Inde pendence and Inflation: â€Å" Figure 1 Central Bank Independence versus Average Inflation. (Louis 2009: 1) More recently, as the top diagram in Figure 2 demonstrates, global inflation has slowed highly since the mid-1990s. On the other hand, as the bottom two diagrams point out, the rapid fall in global inflation was primarily due to growths in emerging marketplace and developing countries. In the advanced nations, the slowing happened much earlier, in the early 1980s. There were numerous causes for the global decline in inflation since the late 1980s, and this included stronger commitments to stability of the price (superior monetary policies), high rates of growth of productivity and the forces of globalization that increased rivalry and enhanced the elasticity of product and labor markets. As recommended by Summers and Alesina, increased independence of central bank appears to be another key motive for the decline in worldwide inflation (Farlex 2013: 1). As publicized in the ta ble below, there was a noticeable increase in central bank independence among the period 1980-89 and 2003. Though this trend was apparent and noticeable among advanced countries, it was particularly visible among developing countries and emerging market. Indeed, majority of the reforms that enhanced independence of the central bank occurred for the period of the 1990s and were in response to high levels of inflatio