Central Bank Independence, Inflation and Money Growth: Evidence from South Africa

Abstract

Purpose: This article evaluates the impact of the de jure independence of the South African Reserve Bank (SARB) on the credibility and discipline of domestic monetary policy. Credibility captures the extent to which economic agents trust the SARB to pursue its price stability mandate and is measured by the relationship between the SARB’s independence and domestic inflation. Discipline relates to the effect of independence on money growth rates, while independence is associated with a more disciplined central bank and moderate money growth rates. Methodology: A simple autoregressive distributed lag (ARDL) econometric specification and Granger causality tests are employed. Following the extant empirical literature, existing indexes of central bank independence (CBI) are regressed on annual rates of inflation and M2 money growth. Findings: A statistically significant negative relationship is established between both i) CBI and inflation and ii) CBI and money growth for the South African economy. This suggests that the SARB’s legal independence plays an important role in containing inflation (credibility) and limiting excessive money growth (discipline). Contribution: This article fills a gap in the extant literature by being the first attempt at formalising the empirical link between de jure CBI, inflation, and the rate of money growth in the South African economy.