The effect of central bank independence on inflation in developing countries

Abstract

Ismihan and Ozkan [Ismihan, M., Ozkan, F.G., 2004. Does central bank independence lower inflation? Economics Letters 84, 305–309.] provide theoretical support for prior studies' empirical findings of positive or no significant relationship between central bank independence (CBI) and average inflation performance. The present paper argues that these findings are spurious because the studies use an econometric methodology that does not account for the measurement error in their proxies for CBI. This paper employs an econometric methodology that does account for this measurement error, and finds a strong negative relationship between CBI and inflation—even though the sample is limited to developing countries.