Introduction

The main purpose of this study is to analyse different aspects of central bank independence and what independence means for the democratic governance of the European Central Bank. In addition I will introduce "the New Zeland -model" of central banking and analyze New Zealand's Federal Bank's record in achieving inflation targets.

During the last two decades there has been a universal change in the way economic policy is implemented. This change has been seen most clearly when viewing the role of monetary policy and central bank in economy. Until the 70€s monetary policy was considered as a way to influence real economy. By exspansive monetary policy one could in the short term increase employment and production although in the long run the effects were no longer recognisable. Politicians were interested in using monetary policy as a tool for achieving short term economic benefits and thus central banks were put under the control of political authorities.

Esa Kaitila: Althought monetary policy has losen its role in influence a real economy it would be interesting to know what has been now considered to be the most important actor in the economy.

In the past the view that monetary policy should not be used for artificially stimulating production has gained more importance among monetary authorities. According to monetarist economic thoughts long run economic growth and well being should be supported by an anti-inflatory monetary policy, that creates credibility and stability in the economy. This would in turn best safeguard an entrepreneur friendly climate and the sustainable economic wellbeing of the citizens.

Independence has been seen as the most appropriate guarantee to ensure that central banks could meet their inflation targets. If monetary decision making is taken out of the hands of politicians, they cannot arbitrarily use inflatory monetary policy to achieve short run benefits such as better employment figures prior to elections. In the eyes of the world€s monetary authorities independence thinking has gained lots of support, but there is still disagreement over the best institutional arrangements.

In the paper I will first look at the theoretical principles of central bank independence. This task will begin by explaining the basic institutional circumstances that in practice set the limits for the implementation of monetary policy. Thereafter, I will explain different aspects of central bank independence and what it means for democracy. The European Central Bank will be studied in third chapter and the New Zealand Reserve Bank in fourth chapter. Chapter five will conclude the paper.

Esa Kaitila: It would be nice to clarify also the role of national Central Banks in the whole system of european monetary policy