By Ademola Oyejide
The concept of central bank policy autonomy, or the freedom of a central bank to use its own discretion for the design and implementation of monetary policy, has continued to attract both rigorous academic research and serious public policy debate. It is not difficult to see why. Central banks are important economic institutions whose activities are vital to the economic well-being of the populations that they are established to serve. Their significance derives, of course, from the fact that they not only influence the key institutions, arrangements and infrastructure which constitute a country’s financial system, but also determine monetary policy. Macroeconomic management of a country is implemented through the manipulation of two key policy levers, i.e., fiscal policy and monetary policy. Hence, in many countries, the central bank typically wields an economic policy power which often stands at par with that of the fiscal authority.
Both the on-going academic research and policy debate reflect the rapidly changing perspectives about the role of central banks as economies evolve through various stages of development, and the unfolding political economy of policy making. The former relates to changes in the range of activities that central banks are uniquely suited to perform as the economic landscape changes. The latter is concerned with the division of labour between the fiscal and monetary authorities in the process of formulating and executing a series of optimal mix of fiscal and monetary policies in the context of each country’s changing economic situation and prospects.