Case of Central Banks and Interest Rates

From which a classical perspective, there are several tools that can be used by central banks of countries in monetary policy (Except the countries which don’t have central banks). Interest rates is one of the most important of them. As we know central banks are independent structures from government for not being used by political utility of the candidate politicians. But it wasn't always like this, and there are also few current examples that can be interpreted as exceptional cases. We will discuss whether interest rates are the best option to keep economy on path or not and differentiation of central banks place among countries.

Due to interest rates are really effective way to impress market expectations, this tool is argued by most of the economist whether interest rates are the best way to keep economy in flow or not and at the same time central banks independence from government can be concluded as disaster or is it becoming more and more dependent to government actions. Interest rates effectiveness is a case that has been debated over decades. It is crucial that interest rates are easier to be implemented to the economy than changing the tax rates(fiscal policy). It is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt (SEABURY, 2020). That means, in response to the wasting of time case it doesn’t matter which instrument that is used to keep economy in flow or keep inflation stable, in fact these things are related to each other. And also we can reach the idea from the statistic that developed countries generally decrease their interest rates as its stagnation increases and increase interest rates while growing GDP, because of not to face with something happened in 2008-09 crisis again. So, controlling the interest rates is the one of the effective way which can be used by central banks and give the power to central banks as well, from which my point of view.

 

 

Other major point is that central banks independence from government, which is believed by mainstream economy that it should be independent. Central banks have been playing an important role in national economy, for instance printing money, setting interest rates at standard level, quantitative easing etc. Setting interest rates less independently from any kinds of government intervention is the most disputed topic. Some economists argue that central banks have so much power to control the whole economy so its features should be restricted from point of view of these economists, most of these economist may come from Chicago School of Economics which they advocate that interest rates are the major instrument to get economy on track. But there are also some opposite examples like Turkey. This helps explain the shock in both financial markets and Western capitals over the firing of Naci Ağbal, Turkey’s central bank governor, by President Recep Tayyip Erdoğan on March 19 after less than five months on the job. Turkey now has its fourth central bank chief in less than two years, yet another indicator of its drift toward authoritarian rule (-, 2021). I know, it’s a bit complicated but if you compare the idea of economist which is  central banks have so much power because of they can control the monetary policy with Turkey’s manner towards central banks independence, you can see the diversity between countries policies and central banks places. Countries like Turkey that has low democracy index, central banks generally are used for benefits of the political candidates, whether country is in stagnation or not. But countries like US,UK or other western European countries central banks have more independence than in countries like Turkey (Schmidt-Hebbel, 2016). However, we can see the instances of those western countries have some intervention to central banks by government in their history. And then came COVID-19, returning central banking to the kind of role it played when, from the 1930s to the 1980s, it was merely an instrument for finance ministries (Tucker, 2020). This period is a period that was affected mostly by Keynesian economics and because of that interest rates were seen less consistent option for usage.

 

As I conclude this writing, central banks have diversity depending on country, when it comes to independence. This diversity will play a determinant role in countries future. While countries that have independent central banks are growing, countries which have less independent central banks will stagnate and will not reach the level of growing economies.

 

References

-. (2021, 03 22). Turkey shows why a central bank’s independence is central. The Chrisitian Science Monitor: https://www.csmonitor.com/Commentary/the-monitors-view/2021/0322/Turkey-shows-why-a-central-bank-s-independence-is-central

Schmidt-Hebbel, K. (2016, 11). The Past and Future of Inflation Targeting: Implications for Emerging-Market and Developing Economies. ResearchGate: https://www.researchgate.net/publication/310808160_The_Past_and_Future_of_Inflation_Targeting_Implications_for_Emerging-Market_and_Developing_Economies/figures?lo=1

SEABURY, C. (2020, 12 17). How Interest Rates Affect the U.S. Markets. Investopedia: https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp 

Tucker, P. (2020, 05). On Central Bank Independence. IMF: https://www.imf.org/external/pubs/ft/fandd/2020/05/paul-tucker-unelected-power-on-central-bank-independence.htm 

 

16/05/2021