Central bank independence and inflation—Old story told anew

Abstract

AbstractCentral bank independence (CBI) and its link to inflation have become a part of conventional wisdom. However, the literature shows that there is a lack of a stable general pattern for the relation between CBI and inflation, even for relatively homogenous groups of countries. In this study, we use two indexes for CBI proposed in the literature. For the panel of 51 countries (24 advanced and 27 nonadvanced economies), we estimate two regression models—one with inflation as a dependent variable and another with inflation gap in this role. We use two estimation methods: the panel fixed effects model with serial autocorrelation in the error term and the Arellano‐Bond difference generalized method of moments estimator. In addition, we use disaggregated indices to check what aspects of independence are of highest importance. Our results suggest that CBI has a negative significant impact on inflation mostly by results for nonadvanced economies and that this relationship did not change during the recent crisis.