Abstract
Since 1990s many countries have moved toward greater central bank independence (CBI) by either amending their Central Bank’s laws or writing them de novo. Also countries of Western Balkans and many other transition countries have moved toward greater CBI. There are many potential benefits associated with greater CBI, and one of them is stable growth of money and liquidity. For a given level of money market development the hypothesis is that a more independent CB is likely to promote more stable growth of money supply (Dželetović et al., 2008). As a result the main research task of this work is to estimate the effects of CBI on money market growth for five Western Balkans countries and five other European transition countries. Because the empirical studies were very limited for the relationship between CBI and money market growth, there were no clear conclusions. In addition, there were different measuring methodologies that attempt to quantify the extent of legal and actual CBI. Related to the main research task, this dissertation has examined the effects of CBI on money market stability (proxied by bank deposit growth) for a sample of 10 countries for a period from 1999-2009 by using fixed effect model. Through this methodology different regressions have been estimated, but the results were not robust and there are no clear finding on the relationship between CBI and money market growth.
Highlights
The Western Balkans comprises of relatively small-sized economies
The money market in the Western Balkans still fall behind from that of the developed one but it is very important to keep them improve because they help maintain stability of money and liquidity, and regulate the economic spectrum and encourage economic development (Galac, Ivičić and Dumičić, 2007). Because it plays a significant role in the process of conducting the monetary policy by the central bank, in this thesis we would like to estimate what are the effects of Central Bank Independence on money market stability
In the case of transition countries, as these positions are decided by prime minister or the parliament due to political turmoil that these economies have experienced, the turnover rates of governors (TOR) is high which may indicate governmental instability and not a direct attack to central bank independence (CBI) (Loungani and Sheets, 1995), so the actual indices will not be used in our empirical study due to this limitation
Summary
The Western Balkans comprises of relatively small-sized economies. Monetary stability and sovereignty in these counties has increased since 1990s which has positively contributed to macroeconomic performance. The money market in the Western Balkans still fall behind from that of the developed one but it is very important to keep them improve because they help maintain stability of money and liquidity, and regulate the economic spectrum and encourage economic development (Galac, Ivičić and Dumičić, 2007) Because it plays a significant role in the process of conducting the monetary policy by the central bank, in this thesis we would like to estimate what are the effects of Central Bank Independence on money market stability. The author suggests that to be part of the European Monetary Union, according to the Maastricht Treaty’s criteria, a country should have stable prices which again can be achieved by greater CBI Another potential benefit arrived from autonomous CBs is stable money growth and less volatility in inflation variability (Eijffinger and De Haan, 1996). Providing the central banks with more independence and credibility will benefit both the economy and the government (Cukierman et al, 1992)
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