Central Bank Independence: Theory and a Brazilian Application

Abstract

This paper aims at studying the relevance of the Central Bank of Brazil's independence for the efficiency of the stabilization policy in this country. Initially, it presents and discusses the main theoretical results concerning the central banks'independence. The normative theory emphasizes that it is efficient to appoint conservative individuals to high offices in independent central banks. The positive theory shows that the degree of independence is negatively correlated with the mean inflation, the inflation variability and the inflationary uncertainty, but is positively correlated with the credibility of monetary policy. Applications for the Brazilian experience discuss the importance of the Central Bank of Brazil's independence for the efficiency of the stabilization policy, focusing on the periods of high inflation (1980/1993) and moderate inflation (1994/...). Indicators for the degree of independence are also established and signal a substantial increase of the independence after the Real Plan.