Central Bank : Asian Financial Crisis Essay
As mentioned in previous sections, a main root of the 1997 Asian Financial crisis is the structural weaknesses and inadequate monetary policy by Asian governments. This paper will discuss three important central bank institutional features - central bank independence, central bank transparency and inflation targeting – and examine whether these features changed after the financial crisis and their impact in terms of helping Asian economies transform into healthier situations post-crisis.
4.1 Central Bank Independence
Prior to the 1997 crisis, monetary policy in Asian countries was believed to be largely controlled by the government with strong political incentives to inflate the economy. Indeed, evidence has shown that central bank independence was once marginal in Asian economies. The practices of Asian central banks were often times facing direct interference by the government, political leaders, and parties, and were, therefore, precluded from their objective. According to Cole and Slade (1998), the President of Indonesia showed a continuing involvement in the loan decisions of both state-owned and private banks. Financial regulators, including the head of the central bank in 1992, and the minister of finance in 1996, faced the challenge of being removed from their positions if they tried to enforce prudential rules on financial institutions that shared close links with the president. The Bank of Korea was once a puppet of the government, given the role of…