Skip to main content

The importance of Central Bank Independence

Central Bank Governor, Gideon GonoEconomic policymakers seek to achieve high employment, rapid growth and stable prices. I am most interested in the role of monetary policy – what it can contribute, and most importantly, how it should be conducted to contribute the most. It is a fact that there is strong correlation between central bank independence and effective output stabilization. At the heart of Zimbabwe’s economic meltdown is a central bank that has amassed a plethora of controls that go beyond its remit.

Substantial quasi-fiscal activities by the Reserve Bank of Zimbabwe (RBZ) have been at the core of the country’s headline-making hyperinflation. Such activities include subsidies made to loss making government-owned enterprises, price supports given to some export sectors, and the interest payments made on open market operations. These activities have eroded the bank’s ability to conduct monetary policy. The RBZ’s solution – printing more money, and freezing prices and wages – has been like pouring water on a drowning man. As a result, Zimbabwe’s central bank has achieved the opposite of what it was created for. Zimbabwe is going through what looks like a never-ending contraction characterized by high unemployment and negative growth.
To attract investment and rebuild the economy, a new monetary policy must be put in place. CATO analyst, Steve H. Hanke proposes replacing Zimbabwe’s central bank with free banking, a currency board, or official dollarization among other systems to restore confidence. I agree with Dr. Hanke that Zimbabwe needs to adopt a new monetary regime, but his proposals do not address the heart of the problem with Zimbabwe’s inflation, namely, the government’s interference with the nation’s monetary authority. As a long run strategy, there is no substitute to Hanke’s proposals, but in the short run, I suggest terminating the quasi-fiscal activities of the central bank, and moving all expenditures to the central budget office controlled by the Ministry of Finance.

Independent of the government, the central bank needs to set itself a steady course and keep to it. Experience has shown that independent central banks can make major contributions towards economic stability. Zimbabwe’s government needs to demonstrate commitment to greater fiscal responsibility. Unfortunately, the recent reappointment of central bank governor, Gideon Gono, tells of a leadership that is only interested in continuing its episodes of interventionist follies. They should also move to scrap price controls, which have only served to reduce availability and encouraged profiteering in the black market by persons (usually government officials) able to access goods at the set prices. Most importantly, there should be an urgent review of the central bank’s mandate with the goal of refocusing the central bank on monetary policy.

Comments

Post a Comment

Constructive feedback is always welcome. Thank you

Popular posts from this blog

Unemployment by state in the USA

Below is a visualization of unemployment rates by county using a powerful Python library called Bokeh . The two maps are for the states of Texas and the Commonwealth of Massachusetts. As the second largest economy in the United States (10th largest in the world), Texas shows interesting county variation in macroeconomic factors such as unemployment. According to Wikipedia , in 2015, Texas was home to six of the top 50 companies on the Fortune 500 list and 51 overall (third most after New York and California). The northern counties were least affected by the financial crisis of 2008/09. Dallas–Fort Worth–Arlington area encompasses 13 counties which constitute the economic and cultural hub of the region commonly called North Texas or North Central Texas. Bokeh Plot The least affected counties in Massachusetts were the southernmost tourist areas of Nantuckett and Dukes County. The ...
Post a Comment
Read more

Malaysia at a Cross Roads: Diagnosing the Constraints to High Income Status

Malaysia at a Crossroads: Diagnosing Constraints to High-Income Status In 2008, Malaysia was recognized by the Growth Commission – a distinguished panel comprising 2 Nobel Prize Winning Economists and other leading development practitioners – as one of thirteen countries that sustained high growth in the post-war period. The 30-year stretch that caught the attention of the Growth Commission was between 1967 and 1997 when Malaysia grew at an average of 7.3% per year. This long stretch of growth was interrupted by periods of external shocks including the Volcker shock of 1986, the Asian Financial crisis in 1997/8, later the so-called Dot Com Bubble of 2001, and more recently the Global Financial Crisis of 2008. Despite these shocks, Malaysia remained resilient - formally earning the title "Upper Middle Income Country" in 1992. (See summary figure that breaks down the country's per capita growth story). As...
2 comments
Read more

Modeling Core PCE inflation: A dual approach

Today's release of the August 2025 Personal Consumption Expenditures (PCE) inflation data drew widespread media attention, with coverage highlighting both the persistence of inflation and its implications for Federal Reserve policy. Across outlets, analysts pointed to resilient consumer spending and income growth as signs of underlying economic strength, even as inflation remains above the Fed's 2% target. The consensus among media reports is that while inflation is not worsening, its stubbornness continues to challenge policymakers navigating a softening labor market and evolving rate expectations. To provide deeper insights into inflation's trajectory, I've developed a forecasting framework that combines two econometric approaches — ARIMA time series modeling and Phillips Curve analysis—to predict Core PCE inflation. This analysis presents a unique opportunity to validate my forecasting methodology against eight months of 2025 data. ...
Post a Comment
Read more