Discuss by collecting and analyzing historical data and by giving Essay

Discuss by collecting and analyzing historical data and by giving up-to-date real life example(s) from the American, UK or Europ - Essay Example However, the inflation bias presence is a typical feature of the system of flat money where the monetary mechanisms are pursued with discretion. Inflation bias exists because of two reasons. First, with the discretionary sovereignty over the monetary policy conduct, nations can fund deficits of the budget by raising the seigniorage cash inflows over the non-inflationary amount. Seigniorage can be part of the maximum tax composition due to the marginal cost of every kind of taxes. To reduce the inflation bias, many nations have opted to give their central banks the legal independence. The paper therefore, analyses and discusses if nations with independent Central Banks also experience a lower inflation. Research Question Most governments and nations impose legal independence on their central banks. Their aim is to cushion the monetary policies from the political interference and from the pressure of electoral to deliver the economic growth at the long term inflationary cost expense. I t is always assumed that the legal independence of central banks from the fiscal authority is crucial as it protects the economy from the debt monetization. Therefore, the paper will answer the question if the commitment of the credible government is deemed to have a reduced rate of inflation. Objective Objective 1 The objective of this research is to find out if countries and nations having independent central banks also have a reduced inflation rate. Objective 2 The objective of the research is to determine ways that governments do in order to minimize the inflation bias. Objective 3 The objective of the research is to discuss through the collection and analysis of historical data and illustrating real life scenarios from the European, UK, or American Central banks. Question Interpretation Governments have alternative institutional arrangements which they exercise the monetary policy responsibility. A common arrangement is through independent central banking. The independent centr al bank is considered as one of the better alternatives for the policy instrument due to their changed in the economic performance. The conventional idea behind the central bank independence is to provide a better monetary policy for the country. The question that has always gone unanswered is if nations that have employed the mechanism of independent central bank experience a lower inflation. The choice between unemployment and inflation is a political choice rather than a technical choice. There is a perspective trade-off between the stabilizing the economy and lowering the inflationary bias. However none of the dimensions have been put into consideration. The inflationary bias evidence has been scarce this is because it requires identifying the inflation rates. Literature Review The independence of central banks has been the conventional mechanism in countries that are developed. For instance, in Europe the nations have confined their powers to surpass the power of central banks through the parliament declaration (â€Å"Central Bank Independence and Inflation†, 2013  ). The nuclear option was never implemented, but it led to a greater incentive for the consensus among the official families. The independence of central banks was much stronger in 1990s. New Zealand had an extreme form of central bank independence when the country was the love for free market reformers. The Reserve bank president was appointed to maintain the rate of inflation between zeros