This paper critically reviews the Central Bank of the Republic of China (Taiwan) Act and finds that the level of legal independence of the Central Bank is relatively low compared to the rest of the world. However, Taiwan has been able to combine low inflation with a legally dependent Central Bank. In this paper an attempt is made to provide the possible explanations to this low inflation/low independence puzzle in Taiwan and argue that Taiwan should still follow the trend of creating a more independent Central Bank.

We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a Central Bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the Central Bank chooses the socially optimal level of inflation. Ex-post, however, the Central Bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the Central Bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the Central Bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.

In this paper, the relationship between political monetary cycles and the Central Bank independence has been studied with using econometrics model. We also analyze the government interference effect on the political monetary cycles. In order to estimate the relationship, we use 39 countries’ data for the periods of 1983-2012. The panel data technique accompanies the random techniques and constant effects are used as the analysis method. The results indicate that in each country there is a significant and negative relationship between the Central Bank independence and the average inflation rate. Since the government interventions in the monetary decisions in the developed countries are less than other countries, these countries have higher positions in the ranking. Countries whose politicians have experienced a hyperinflation put the Central Bank under the pressure of political monetary changes in order to reduce inflation and it will lead to decrease the Central Bank independence what indicated above was the reason of why these countries were placed at a lower position of the ranking.

New monetary literatures widely concentrates on the importance of institutional arrangements in the effectiveness of monetary policy. The debate regarding the optimal institutional design of Central Banks, independence and conservatism are usually considered to be the most important ingredients for a stable and successful monetary policy. Therefore, the purpose of this study is to deal with the institutional arrangements of monetary policy especially Central Bank independence (CBI) and Central Bank Conservatism (CBC). Indices used by Grilli et al. (1991), Cukierman (1992), Mathew (2006) and Dumiter (2009) were applied to calculate the CBI during 1961-2016, and CBC in Iran using a dynamic optimal solution under commitment in Barro-Gordon and New-Keynesian forward looking Philips Curve models. Results show that the relative concern on inflation is smaller than that on output gap for the Central Bank of Iran. Also results regarding the calculations of CBI based on different indices reveals the fact of insufficient independence of Central Bank in Iran.