Explain how transparency helps eliminate the problems that are created by central bank independence.

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pohnpei397 eNotes educator| Certified Educator

Typically, central banks are independent from political control to a large degree.  This is seen as a necessary situation in order for the central banks to be trustworthy.  The idea is that a central bank that was controlled by politicians would act in ways that would be good for those politicians in the short term.  When central banks acted in these ways, they would tend to harm the long-term interests of their countries’ economies.  Therefore, they were given independence.

The problem with this is that central banks are at least partly private institutions.  (In the past, central banks were typically more completely owned by private parties.)  This means that you have a situation where a central bank is competing in some ways with other banks.  At the same time that it competes with other banks, the central bank has close connections to the government.  This can be seen as very unfair and it can lead to a lack of trust among other banks.

This problem is solved to some degree by having central banks be more transparent.  Central banks tend to try to make their aims clear to all.  When they do this, it becomes more acceptable to allow them to have the degree of power that they do. 

Thus, transparency helps to alleviate the problems associated with having a powerful central bank that is at least partly private and is not controlled by a government.