CBI

Question 1

How does Walsh (2005) define CBI?

Answer 1

• CBI refers to the freedom of MP makers from direct political or governmental influence in the conduct of MP

Question 2

What are the 3 vague sub-divisions of CBI?

Answer 2

1. Goal Independence
2. Instrument Independence
3. Personal Independence

Question 3

Describe goal independence?

Answer 3

• extent to which CB can choose goals
• if they are given ultimate goal are they free to set their own target values

Question 4

Describe instrument independence

Answer 4

• extent to which CB has control over relevant MP instruments

Question 5

Describe personal independence?

Answer 5

• extent to which CB can resist formal or informal pressure from government etc regarding conduct of MP

Question 6

Name main instruments?

Answer 6

• CBM (reserves)
• bank rate

Question 7

Name main intermediate targets

Answer 7

• Broad money
• Exchange rate
• Inflation Expectations
• Nominal income

Question 8

Name main final goals

Answer 8

• inflation
• output
• price level

Question 9

Describe the basic idea of instruments, targets and objectives

Answer 9

• instruments strongly influence intermediate targets and intermediate targets then influence final objectives

Question 10

Why are intermediate targets necessary?

Answer 10

• necessary due to time lags with MP
• instruments effect intermediate targets much quicker than final goals
• also used as indicator variables to see if MP is having desired effect

Question 11

Describe the benefits of a zero inflation target over a price level target

Answer 11

• under a zero inflation target, actual inflation and output is less variable

Question 12

Describe the benefits of a price level target compared with zero inflation target

Answer 12

• under price level target actual future price level is known with more certainty