Suppose a government implements rules that result in a more independent central bank. What effect do you think this more independent central bank will eventually have on money growth and inflation in that country? Explain.

What will be an ideal response?


Research suggests as central bank independence increases, average inflation rates decrease (which implies that money growth must be lower as well). The possible explanation for this deals with political manipulation of monetary policy. We would expect to see at some point both slower money growth and lower inflation.