The relationship of each Central Bank in different countries with their government is so different rom each other. Some are more independent while others are more subservient. However, recent decades witnessed the trend of Central Banks increasing their independence, with reference to whether the Central Bank has autonomy to determine the nation’s monetary policy, or whether such banks should be under Central Government’s control, aiming to achieve price stability. This essay will introduce some typical Central Banks with different degrees of independence, compare the inflation rate in their countries and analyze the relationship between Central Bank Independence (CBI) and inflation.
2. Overview of Central Banks with Different Independence Degree
For those central banks which are more independent, government public servants and elected officials may comment on policy but the governor of the bank is under no obligation to take account into the views of anyone other than his or her own staff and board of directors. The argument for an independent central bank is that it enables monetary policy to be formulated with a long-term view of maintaining stable prices and prevents monetary policy from being used for short-time, political purpose. The typical independent central banks are the Federal Reserve System of the U.S. ,the German Bundesbank and the Reserve Bank of New Zealand. In addition ,after adopting a single currency, the Euro, to the EC(the European Community) , it is universally accepted that the new European Central Bank which controls the currency is an independent bank.
On the other hand, for those more subservient to the central government, it is the government that carries the day in the event of difference of opinion between the leader of the central bank and the governor. Some supporters for subservient central banks may maintain that monetary policy should be subject ultimately to democratic control ,such as fiscal policy and indeed all other government policies. The Bank of England is a bank of this type. Although it is the Chancellor of the Exchequer that responsible for the United Kingdom’s monetary policy, the governor of the Bank of England is still of pivotal importance. Not only his expertise and authority in the economic field, but also his quality of advice that he received from other professional staff in the bank which will undoubtedly be of considerable assistance to decision-makers.
Relationship Between CBI and Inflation
3.1. Description of the Relationship
Central bank independence relates to the balance of authority between the central bank and the government. The more independent a central bank is, the less influence the political authorities have on the implementation of monetary policy. What should not be lost sight of is that there is no absolute bound between independence and subservience. In other words, a central bank is unlikely which is completely independent from the central government, nor in an obviously subordinate position to it. Here a concept which should be mentioned to is “independence index”, which has been created by Bade and Parkin , Cukierman , Grilli, Masciandaro and Taballini , Eijffinger and Schaling [1993a, 1993b] among others, measuring the degree of independence of central banks across countries. Here, “1” represent the level which is the most independent ,while “0” stands for the one which is most dependent on its central government. All the independence indexes are between 0 and 1. Empirical and theoretical findings imply an inverse relationship between CBI and the level or first moment of the inflation rate. According to Robert J. Franzese, Jr.1(1997), results of empirical tests on the relationship between inflation and CBI by Bade and Parkin , Alesina , Cukierman et al.  and Siklos  all confirm a significant relationship between inflation and central bank independence. Thus the empirics (2001)have implicitly assumed that each increment in the degree of CBI has a fixed negative impact on inflation ceteris paribus; i.e. the effect of CBI on inflation, has been assumed constant and estimated as such by construction.
Figure 1: A Typical Relation Between Inflation and CBI
Source: Robert J. Franzese, Jr.1 (1997) Independent Central Banks, Politically Responsive Governments, and Inflation Independent Central Banks, Politically Responsive Governments, and Inflation
Figure 1, compares postwar-average inflation in some countries to an index measuring their degree of CBI. From the linear pattern in figure 1, the correlation between CBI and inflation rate is obvious: each 0.1 increase in CBI is estimated to bring a (fixed) 0.5 reduction in inflation, and vice versa. Although there are only a few of the dots located on the line, the negative correlation is still satisfied as the points which are scattered unevenly on both sides of the line with not too evident absolute dispersion. In the case of some points, such as Norway, Japan, which are far from the line, will be analyzed in the fourth section of this essay.