Index Of Central Bank Independence Research Articles

Central Bank Independence and Inflation in Latin America—Through the Lens of History

AbstractWe study the link between central bank independence and inflation by providing narrative and empirical evidence based on Latin America's historical experience. Using a novel historical data set of central bank independence for 17 Latin American countries, we recount the rocky journey traveled by central banks to achieve independence and price stability. Our empirical analysis finds a strong negative association between central bank independence and inflation over the last 80 years, with improvements in independence resulting in a steady decline in inflation. Results are robust to endogeneity concerns and to using alternative central bank independence indices.

Criteria for Central Bank independence and inflation

There are many studies on the relationship between central bank independence and inflation. Anumber of authors have come to the conclusion that there is a negative relationship between them, inwhich the independence of the central bank helps to reduce inflation. But other authors have questionedthis conclusion. This study tested the hypothesis that there is a negative statistical relationship betweenthe inflation rate and the values of the CWN and GMT indices of central bank independence, as well astheir constituent sub-indices for developed and post-Soviet countries for 2001-2020. The methods ofeconometric and correlation analysis have established the absence of a statistically significant negativeimpact of the independence of central banks, measured by the CWN and GMT indices and their subindices,on inflation in developed and post-Soviet countries, which is true throughout the entire timeinterval. Graphical analysis and then econometric analysis showed no negative relationship betweenthese indices, as well as their sub-indices, and inflation in certain years, both in developed and post-Soviet countries. Moreover, in some cases, on the contrary, their positive relationships were revealed. Atthe same time, based on quantitative estimates, it was concluded that the relationship between centralbank independence and inflation weakens as it decreases. It requires verification and confirmation in thecourse of further research.Key words: central bank independence, inflation, CWN and GMT indices, developed countries,post-Soviet countries.

The political economy of reforms in Central Bank design: evidence from a new dataset

AbstractWhat explains the worldwide changes in central bank design over the past five decades? Using a new dataset on central bank institutional design, this paper investigates the timing, pace and magnitude of reforms in a sample of 154 countries over the period 1972–2017. I construct a new dynamic index of central bank independence (CBI) and show that past levels of independence, as well as regional convergence, represent important drivers of changes in central bank design. An external pressure, such as obtaining an IMF loan, or political events, such as democratic reforms and the election of nationalistic governments, also impact the reform process. Reforms also follow periods of high inflation rates suggesting an endogenous evolution of CBI. The results also reveal important heterogeneities in the reform process depending on the level of development, the size and direction of reforms, as well as the different dimensions along which central bank legislation can be amended.

Causality Relationship between Central Bank Reforms and Inflation: Evidence from Developing Countries

This study provides evidence on the relationship between central bank reforms and inflation dynamics in a sample of 37 developing countries. We use panel structural break test and Granger non‐causality tests on annual inflation and the legal index of central bank independence (CBI), as a proxy of central bank reform, over 40 years period. The empirical results indicate a positive effect of central bank independence on inflation stabilization. Besides, we find that there exists bi-directional causality between central bank reforms and inflation. These findings suggest that central bank independence is beneficial in terms of sustained macroeconomic stabilization and should harness among developing countries. In particular, reforms should design to give central banks more autonomy in the conduct of monetary policy and financial sector regulation. JEL Classifications: E31, E58How to Cite:Anwar, C. J., & Nicholas, O. (2020). Causality Relationship Between Central Bank Reforms and Inflation: Evidence from Developing Countries. Signifikan: Jurnal Ilmu Ekonomi, Vol. 9(1), 15-30. doi: http://dx.doi.org/10.15408/sjie.v9i1.10955.

The Political Economy of Reforms in Central Bank Design: Evidence from a New Dataset

What explains the worldwide changes in central bank design over the past five decades? Using a new dataset on central bank institutional design, this paper investigates the timing, pace and magnitude of reforms in a sample of 155 countries over the period 1972-2017. I construct a new dynamic index of central bank independence and show that status quo, as well as regional convergence, represent important drivers of changes in central bank design. An external pressure, such as obtaining an IMF loan, also impacts the reform process, while political or economic factors have a heterogeneous impact depending on the level of economic development. Reforms also follow periods of high inflation rates, suggesting an endogeneous evolution of central bank independence. The results also reveal important heterogeneities in the reform process depending on the level of development, the size and direction of reforms, as well as the different dimensions along which central bank legislation can be amended.

Measuring Central Bank Independence for Vietnam

Recent instabilities in conducting monetary policy in Vietnam’s macroeconomics demand instant preparations for adopting a new framework: Inflation targeting. In fact, the State bank of Vietnam has shown the International Monetary Fund its willingness to adopt this framework over the past 5 years since 2005. In order to prepare for successfully adopting this framework and reaching price stability, firstly, and most importantly, the central bank needs to have a certain degree of independence. In fact, the negative relationship between the degree of central bank independence (CBI) and inflation is found in both industrialised countries and developing countries. In this study, legal central bank independence indices are calculated for Vietnam according to the newest and most popular methods of Grilli, Masciandaro, and Tabellini (1991) and Cukierman (1992). We compare and conclude that the central bank independence index of Vietnam is lower than that of other emerging countries. In these countries, like Vietnam, the Central bank is a member of Government. Suggestions for the State bank of Vietnam in terms of improvements in lending regulations to government, thus, are provided.

Best Article Award: Hueng

The Atlantic Economic Journal is proud to announce that the winner of the Best Article Award is C. James Hueng of Western Michigan University. His paper, entitled, “Central Bank Behavior and Statutory Independence,” appeared in the June 2012 issue of the AEJ. A distinguished committee reviewed all eligible papers published in that same year. The committee was chaired by IAES Vice President Asli Demirguc-Kunt of the World Bank. Members of the committee included the AEJ Board of Editors and IAES Endowment Fund Sponsors. The Managing Editor gratefully acknowledges the participation and diligence of all committee members who participated in the review process. The award emphasizes the intellectual and scholarly approach to economic research which has always been a focal point of the AEJ. This novel paper integrates the policy reaction function literature with the literature on central bank independence (CBI). The paper compares “what central banks actually do as opposed to what they are legislated to do.” The majority of empirical research on the time inconsistency model has been devoted to testing the relationship between economic performance and the degree of central bank independence measured by various CBI indices, such as the legal CBI. However, the distant link between institutional designs and economic performances complicates testing the relationship between the two due to endogeneity and the missing-variable issues. For this reason, the paper focuses instead on a more direct link between CBI indices and the central bank behaviors, and analyzes which aspects of the legal CBI are more consistent with central bank behaviors. Central bank behavior, which reflects the practical CBI, is described by the policy reaction function, in which the monetary policy instrument reacts to information on the state of the economy. If the legal CBI is consistent with the practical CBI, it is expected to be positively associated with the size and the speed of the central banks’ reaction to inflation shocks. The author used macro data from 18 OECD countries during the 1980s to estimate various versions of the Taylor reaction functions. Comparing the estimation results with several published CBI indices, the author found that certain aspects of legislated differences in CBI generate variations in the anti-inflation behaviors of central banks. Atl Econ J (2014) 42:1–2 DOI 10.1007/s11293-014-9412-8

Effective Monetary Policy Conservatism: A Comparison of 13 OECD Countries

AbstractEmpirical studies of the influence of central bank independence and inflation have yet delivered quite inconclusive results. We argue this to be due to the failure to focus an actual central bank independence and to take the degree of conservatism of the government and the central bank into account. In this paper, we propose a new methodology of measuring the joint degree of central bank independence and conservatism from observed central bank behaviour. After applying the method to 13 OECD countries, we find our indicator to be negatively correlated with a legal index of central bank independence, but positively correlated with the turnover rate. As the latter exclusively focuses on factual central bank independence, the remaining difference might be attributed to conservatism.

Dynamic central bank independence indices and inflation rate: A new empirical exploration

It has been argued that economies with more independent central banks experience lower inflation over time. In this paper we show that this relationship is sensitive to the methodology through which central bank independence indices are constructed. We stress the importance of employing dynamic central bank independence indices in two ways. First, we perform unit root tests with structural breaks to verify if the implementation of central bank reforms represents a structural break for the inflation rate dynamics. Second, we implement a panel data analysis.We find evidence that legislative reforms that modify the degree of independence of a central bank have a strong impact on the inflation rate dynamics. Moreover, underlying the importance of employing dynamic central bank independence indices, we confirm the negative relationship between the latter and inflation for a sample of 10 OECD countries.

Dynamic Central Bank Independence Indices and Inflation Rate: A New Empirical Exploration

It has been argued that economies with more independent central banks experience lower inflation over time. In this paper we show that this relationship is sensitive to the methodology through which central bank independence indices are constructed. We stress the importance of employing dynamic central bank independence indices in two ways. First, we perform unit root tests with structural breaks to verify if the implementation of central bank reforms represents a structural break for the inflation rate dynamics. Second, we implement a panel data analysis. We find evidence that legislative reforms that modify the degree of independence of a central bank have a strong impact on the inflation rate dynamics. Moreover, underlying the importance of employing dynamic central bank independence indices, we confirm the negative relationship between the latter and inflation for a sample of 10 OECD countries.

Does central bank independence reflect monetary commitment properly? Methodical considerations

Central bank independence (CBI) has attracted much attention in economics and politics in recent years. The concept is based on the political economy literature on monetary policy. In this paper, we argue that CBI is an incomplete approximation to legal monetary commitment. We first discuss the nature and criteria of commitment, then show the shortcomings of the most important indices of CBI before we introduce an alternative measure of legal monetary commitment. This measure is more comprehensive and includes more aspects of commitment than the indices of CBI. A first empirical comparison of this index and a leading CBI index strengthens the argument. JEL Codes: E52, E58 Keywords: Monetary Policy, Monetary, Policy

Central Bank Behavior and Statutory Independence

This paper integrates the Taylor reaction function literature with the literature on central bank independence (CBI). The central bank’s policy reaction function describes its behaviors, which measures the practical CBI, as opposed to the legal CBI measured by CBI indices. By analyzing the relationship between various legal CBI indices and the central banks’ reactions to inflation for 18 OECD countries, we find that the difference of behaviors among central banks is consistent with the economic measure of independence, which measures how easy it is for the government to finance its deficits by direct access to credit from the central bank.

Does Government Ideology Matter in Monetary Policy? A Panel Data Analysis for OECD Countries

This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers.

Does government ideology matter in monetary policy? A panel data analysis for OECD countries

This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1–2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers.

CENTRAL BANK INDEPENDENCE AND ECONOMIC GROWTH: AN ANALYSIS OF THE LINK BETWEEN THEM

This paper presents a simple Barro-Gordon type model to explain the link between central bank independence (CBI) and inflation. It then extends the model to examine the link between CBI and economic growth. Using an index of CBI created by Cukierman, Webb and Neyapti (1992) the paper empirically tests the link between CBI, investment and growth. This paper finds no evidence that CBI promotes investment or growth.

Does Government Ideology Matter in Monetary Policy? - A Panel Data Analysis for OECD Countries

This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers.

Legal Central Bank Independence and Inflation in Latin America During the 1990s

This paper reviews central banks’ legal reform in Latin America during the 1990s and discusses the status of central bank independence in the region. Based on this information, it builds a simplified index of central bank independence which, in addition to the commonly used criteria of political and economic independence, incorporates provisions of central banks’ financial autonomy, accountability, and lender-of-last-resort. The paper finds a moderate negative correlation between increased central bank independence and inflation during 1999–2001 in 14 Latin American countries. Dissagregating the index, the same analysis suggests that economic independence is the key component driving the observed negative correlation between legal central bank independence and inflation.

Legal Central Bank Independence and Inflation in Latin America During the 1990's

This paper reviews central banks’ legal reform in Latin America during the 1990s and discusses the status of central bank independence in the region. Based on this information, it builds a simplified index of central bank independence which, in addition to the commonly used criteria of political and economic independence, incorporates provisions of central banks’ financial autonomy, accountability, and lender-of-last-resort. The paper finds a moderate negative correlation between increased central bank independence and inflation during 1999–2001 in 14 Latin American countries. Dissagregating the index, the same analysis suggests that economic independence is the key component driving the observed negative correlation between legal central bank independence and inflation.

Central Bank Independence in Transition Economies

The paper discusses recent changes in central bank laws and the relationship between inflation and central bank independence in transition economies. Two indices of legal independence are constructed, covering political and economic aspects of independence. Most of the countries experienced high‐inflation episodes in the recent past and changes introduced to the laws after, or simultaneously, with stabilization programmes strengthened the position of the central banks. In further analysis, an inverse relationship emerges between inflation and indices of central bank independence. However, the robust relationship is present only at a high level of economic liberalization. This conclusion is supported by results from regressions on time‐aggregated and panel data, even after controlling for the government fiscal position and the absence/presence of an IMF stabilization package.

Median voter preferences, central bank independence and conservatism

This paper studies how the independence and theconservatism of a central bank relate to the structureand stability of the median voter preferences. This isdone by means of a model of endogenous delegationwhere an opportunistic policy maker chooses themonetary regime (independence and conservatism) tomaximise the welfare of the median voter. The resultsshow that a high degree of inflation aversion ofmonetary policy is not necessarily associated with ahigh degree of central bank independence. A high andstable degree of inflation aversion of society (i.e.of the median voter) may lead to establish a dependentcentral bank which is highly inflation averse. This suggests that the negativecorrelation between inflation and central bankindependence indices detected by several empiricalstudies may reflect a link between inflation and somedeep features of social preferences.