Question

In some countries, the president chooses the head of the central bank. The same president can fire the head of the central bank and replace him or her with another director at any time. Explain the implications of such a situation for the conduct of monetary policy. Do you think the central bank will follow a monetary policy rule, or will it engage in discretionary policy?

Short answer

It's possible that monetary policy will be conducted in a discretionary manner.

Step-by-step solution

Content Introduction

If the president can choose and replace the head of the central bank at any time, the bank follow discretionary policy rather than a monetary policy.

Content Explanation

The president's ability to appoint and replace the head of the central bank is due to the president's political position, and they're likely to choose an elected politician out of nowhere, thereby turning the central bank into a political organisation. As a result of the politics at play, the central bank is more likely to participate in discretionary policy than than monetary policy rule, because the president or head of the central bank wants to stay in power.