Abstract
Post-crisis literature concentrates on the problem of low inflation economic environment for which traditional factors of macroeconomic instability are rather not important. However, is this approach adequate in the case of post-socialist countries for whom the validity of euro-integration divide of institutional path of development takes place? Can the fact of factionalized societies explain the deviations from traditional form of opposite correlation between central banks independence and inflation? Using a sample of 22 post-socialist countries, it is found that there is inverse (traditional) relation between central bank independence and inflation. The degree of such correlation does not decrease much in the case of a lower inflation period. Development of democracy supports the choice toward higher central banks independence. The level of social conflicts affects inflationary instability and in the same time reduces space for consensus about increasing central banks independence. At the same time, the case of higher central bank independence and higher level of inflation compared to average group level (case of Ukraine) corresponds to the strongest fractionalization of society. This helps to conclude that institute of central bank independence is based on informal political rules of behaviour, incentives to maintain which are rooted in the nature of social disharmony.
Highlights
Post-socialist countries have undergone a relatively short period of institutional transformation of central banks
The basis hypothesis of the article suggests that the traditional view that the relation between the level of central bank independence and inflation must be confirmed for post-socialist countries, taking into account the institutional trajectories of their development
Grouping the countries according to the up / down deviation from the average values of the GMT-index and inflation showed that the lowest level of social fractionalization occurs in countries with an above-average independence of the central banks and below-average inflation
Summary
Post-socialist countries have undergone a relatively short period of institutional transformation of central banks. Over the past 15 years, most of them were able to transition monetary authorities from a planned model to the implementation of the best practices of the functioning of central banks This allowed some countries to meet the formal requirements for EU membership, and certain new EU members – for the euro zone. The reduction of inflation continues to be a difficult task for a number of former Soviet republics Some of these countries have been able to transform the central banks institutionally for one reason or another. The traditional view of the inverse relationship between the level of independence of monetary authorities and inflation, finding confirmation at the initial stages of market transformation, would have to undergo some modification. It is vital to determine how social fractionalization causes the deviation of inflationary outcomes from those that are theoretically foreseen by the standard view of the inverse relationship between inflation and the autonomy of monetary authorities
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