Abstract
Abstract The notion that an independent central bank reduces a country’s inflation is a controversial hypothesis. To date, it has not been possible to satisfactorily answer this question because the complex macroeconomic structure that gives rise to the data has not been adequately incorporated into statistical analyses. We develop a causal model that summarizes the economic process of inflation. Based on this causal model and recent data, we discuss and identify the assumptions under which the effect of central bank independence on inflation can be identified and estimated. Given these and alternative assumptions, we estimate this effect using modern doubly robust effect estimators, i.e., longitudinal targeted maximum likelihood estimators. The estimation procedure incorporates machine learning algorithms and is tailored to address the challenges associated with complex longitudinal macroeconomic data. We do not find strong support for the hypothesis that having an independent central bank for a long period of time necessarily lowers inflation. Simulation studies evaluate the sensitivity of the proposed methods in complex settings when certain assumptions are violated and highlight the importance of working with appropriate learning algorithms for estimation.
Highlights
The impact of the institutional design of central banks on real economic outcomes has received considerable attention over the past three decades
We have shown that even for complex macroeconomic questions, it is possible to develop a causal model and implement modern doubly robust longitudinal effect estimators
We believe that this is an important contribution in light of the current debate on the appropriate implementation and use of causal inference for economic questions [39]
Summary
The impact of the institutional design of central banks on real economic outcomes has received considerable attention over the past three decades. Whether central bank independence (CBI) can lower inflation and provide inflation stability in a country is a controversial issue. It has been claimed that more than 9,000 works have been devoted to the investigation of the role of CBI in influencing economic. This work is licensed under the Creative Commons. After the 2008–2009 Global Financial Crisis, the debate on the optimal design of monetary policy authorities has become even more intense
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