Why is central bank independence important?
An easy to understand explanation from the Czech Central bank:
Independence is important for the fulfilment of the central bank´s primary monetary objective, which for the vast majority of central banks is to maintain price stability. The importance of price stability ensues from empirical experience with the world economy, which confirms that high and volatile inflation has negative economic consequences. These manifest themselves through several channels. As a rule, higher inflation implies greater inflation volatility, causing investors to focus more on short-term financial investments and on hedging against inflation, and consequently less on longer-term productive investments. Higher inflation is associated with higher nominal interest rates, which stimulate inflow of short-term risk capital. When inflation is high in the long term, inflation and depreciation expectations become fixed in the decision-making of economic agents. Unforeseen high inflation causes several other economic distortions that reduce the growth potential of the economy. For instance, it redistributes income from creditors to debtors, it erodes the value of savings, and it distorts the tax system...The importance of central bank independence comes to the forefront here primarily because politicians may seek to compel the central bank to adopt measures that although in the short-run may boost economic growth, in the long run will lead to an undesirable rise in inflation. Economic growth will meanwhile return to its original level, or even sink to a lower level (as a result of the higher inflation). A sufficient degree of independence from political influence allows the central bank to resist such pressures.
