CENTRAL BANK INDEPENDENCE, POLICY TOOLS, AND MACROECONOMIC OUTCOMES IN A CHANGING GLOBAL ENVIRONMENT
Abstract
This research examines the multifaceted role of central banks in balancing inflation control and the stimulation of economic growth, a role that has been increasingly scrutinized in light of pandemic-induced disruptions to global financial markets, recurring financial crises, and structural changes within the markets themselves. The study empirically assesses the impact of both traditional and unconventional monetary policy instruments on macroeconomic outcomes by conducting a panel data analysis covering six economies, the United States, the United Kingdom, Brazil, India, South Africa, and Indonesia, over the period from 2005 to 2023. The theoretical foundation is drawn from the monetary policy transmission mechanism, rational expectations theory, and the Taylor rule, while institutional aspects such as central bank independence and inflation expectations are also incorporated. The policy tools examined include the policy interest rate, quantitative easing, expansion of the central bank balance sheet, foreign currency interventions, and macroprudential measures. The results show that although interest rate adjustments are typically employed to curb inflation, they can also hinder short-term economic growth, particularly in emerging market economies. By contrast, unconventional measures such as quantitative easing display a positive association with economic growth without generating excessive inflationary pressures. The analysis underscores that the independence and credibility of central banks significantly enhance the effectiveness of policy transmission and help anchor inflation expectations. The findings also highlight that foreign exchange interventions and credit market volatility tend to be more disruptive in economies with less developed financial systems. Additionally, the growing involvement of central banks in areas such as digital currency management, climate risk mitigation, and financial inclusion underscores the importance of adopting policy frameworks that are flexible, transparent, and well-integrated. The evidence contributes to ongoing policy debates by offering empirical insights into how central banks can adapt to future macroeconomic uncertainties while safeguarding both stability and sustainable development.
Keywords: Central Bank Independence, Monetary Policy Transmission, Inflation, Economic Growth
