Explain what is meant by the ‘efficient market hypothesis’ (EMH). On what basis have some authors argued that the recent crisis undermines the EMH? What is your opinion on the validity of the EMH following the crisis?

The efficient market hypothesis is the financial theory that states that the prices of the stock provide all the information about the true value of the assets. In recent years the economic crisis of 2008-2009 has raised many questions regarding the efficient market hypothesis. Many individuals believe that the efficient market hypothesis is responsible for the financial crisis. The reason for which many believes that an efficient market hypothesis does not exist is that if the financial markets were efficient, then why investors unable to perform well in the securities and housing markets (Malkiel, 2011).

However, in my opinion, there have been restrictive interpretation of the efficient market hypothesis. The EMH does not state that the prices of the assets will always be correct or wrong. In addition EMH has never stated that the bubbles in the prices of the assets will never exist. It means that EMH is strongly supported by the data, and EMH can exist with behavioral finance. Therefore it can be said that there is a need to interpret the EMH theory correctly (Courtois, 2009).

1.      Clearly outline the arguments in favor of and against the independence of central banks. Recent debate has focused on the importance of central bank independence in their role setting monetary policy. In this context, what is your view as to the importance of the existence of an independent central bank? 

The central bank plays a key role in controlling the supply & demand of money. The central bank is the “lender of last resort” and responsible for financial stability in any country. Many economists believe that the central banks have key role in economic stability hence central bank should be independent in creating the monetary policy. There are many reasons for making the central bank independent. The first reason for which the bank should be made independent is to avoid providing funds for government deficits. If the central bank will be independent than the political parties or politicians will unable to use the central bank as scapegoat.

The politicians do not have necessary knowledge or expertise regarding the monetary policy, and if the politicians are going to interfere in the matters of the central bank than the central bank might unable to create efficient economic policy. That is why many economists believe that the central bank should be independent in making monetary policy. Although there are many arguments which are in favor of the independence of central bank however there are some arguments which are against the independence of central bank.

The first argument against independence is that the accountability of the bank will suffer up to lot of extents. If the central bank is made independent than public might have no control over the entity. If central bank has been independent than the bank can work in its own best interest and might neglect the overall benefit of the country or economy.