Based on the view that independent central banks foster monetary discipline, macroeconomic stability, and investor confidence, the Parliament of the imaginary country of Economia has decided to establish an independent central bank. A charter is established for the Central Bank of Economia that gives it the mission of pursuing macroeconomic stability and long-run growth. The Head of the Central Bank will be appointed by the President to a five-year non-renewable term. Once appointed, the Head of the Central Bank cannot be fired except for criminal acts or gross neglect of duty, as determined by a Parliamentary investigation. The Central Bank staff is responsible only to the Central Bank management, and the Central Bank's administrative budget is established at five-year intervals along with the appointment of the new Head.
The President of Economia appoints as the first Head of the Central Bank a widely respected financial expert who had previously been the Chief Financial Officer for a major national conglomerate. Financial markets fluctuate in response to the appointment as private investors try to guess what kind of policy the new Head of the Central Bank might follow. Recognizing that misinterpretations of his actions or intentions could potentially have a large impact on financial markets and investors, the Head of the Central Bank is cautious and vague in his public announcements.
A small scandal develops when a Central Bank insider leaks the Bank's inflation targets for the next year. The markets react sharply, first negatively and then positively. The Head of the Central Bank, concerned about this instability, establishes a strict security regime for Central Bank information. All Central Bank targets and statistics are required to be kept strictly secret.
Suppose you are considering setting up a major ore processing and part fabrication plant in Economia. Because the investment is long-term and will involve a mixture of local and foreign currency expenditures and receipts, you are concerned about macroeconomic stability. An important issue is whether the Central Bank will provide independent discipline on macroeconomic policy. To what extent do you think that the Central Bank will be able to pursue prudent monetary growth rules, i.e. how would you assess the credibility of the Central Bank's independence? Click on the button corresponding to your choice.