The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions. Interestingly, the market also forces central banks to remain accountable and independent when it is under government pressure.
5 Besides the market revolt and strictures during the Argentine episode of 2010 that I recounted in my introductory remarks, it is to be noted that both of this year’s emerging market sovereign bond and currency meltdowns got catalysed through a perception of government influence on central bank’s monetary policy, including through sporadic communication by government with public on its desire to control the central bank’s decision-making.