China's Central Bank The Independence Of Research

This dissertation studies existing literature on central bank independence and the case in our country, and discusses the future of central bank. Central bank independence (CBI) literature provides both empirical evidence and theoretical expositions to the notion that the degree of independence of the economy's central bank can predict the behavior of inflation. Specifically, that there exists an inverse relationship between the level of independence of a central bank and the inflation rates. To wit, the literature posit that economies with high level of CBI enjoy low and stable inflation. It is the implied stability of inflation rates that serves as the motivation for this dissertation. Since inflation rates feature in the determination of nominal values, its predicted level and variability influence decision-making by agents in an economy and make efforts at estimating it an important venture. Therefore, this study is not only of academic interest but has practical implications at all levels of decision-making. The theoretical literature on the CBI can be linked to the exposition by Kydland and Prescott (1977) on the topic of rules and discretion that posited the notion of dynamic time inconsistencies resulting from discretionary policies. Time inconsistency occurs when the future arrives and therefore policy announced today is no longer optimal when the future arrives and therefore policy makers adopt a different policy. The authors assert that this policy discrepancy and the uncertainty it engenders can be overtime by rules, enforceable through institutional arrangements. The arrangements may be linked to the contents of a central bank charter that enhance the bank's independence from governmental influence. Economic literature is replete with empirical evidence that attests to an inverse relationship between inflation and the degree of central bank independence. Additionally, studies suggest links between CBI and other macroeconomic factors. The second factor that motivates this study is the growing adoption of CBI as a major economic tool in both developed and developing countries. The latter trend is likely to further deepen and strengthen the influence of CBI policies on the behavior of financial and economic factors. Of significant mention is the European monetary system, which actually enjoins member countries to institute measures to enhance their central banks. Another factor backing this study is the central banks are going to face the challenges resulting from information improvement and financial globalization. Can central bank survive the IT revolution? Will it be substituted by free banking or a world central bank? The banking system is likely to remain a lively field for discussion, debate and experimentation. Despite all of the arguments, we can ensure one thing: the independence status of central banks nowadays could not be kept in the future. The structure of the rest of the dissertation contains four parts: Chapter One contains a comprehensive review of meaning and theoretical literature on CBI. Chapter Two presents the measurement and empirical test on CBI. Chapter Three discusses the future of the central bank. Chapter Four deals with the CBI in our country, and provides the conclusion: our central bank should strengthen the internal independence and the cooperation with all levels of international economical organization.