Legal Central Bank Independence Research Articles

Uncovering the (Possible) Relationship between Central Bank Independence and Economic Growth in the Context of Monetary Unions

Abstract This work estimates the relationship between Central Bank Independence (CBI) and economic growth in the context of monetary unions, using dynamic panel models. We use two measures of CBI: the Legal CBI index and the irregular turnover rate. When an irregular turnover of the Central Bank Governor occurs, it harms growth for countries outside monetary unions. On the contrary, the Legal CBI index is a positive factor for growth, although only regarding countries belonging to monetary unions. The limitations on lending to the government is the most important component of the Legal CBI, which explains this result. Additionally, we analyse sub-samples taking into account the level of income, the number of crises, the existence of quantitative easing policies, and different time windows. Interestingly, 1990–2013 was a harmful period for growth for the entire sample but benign for countries that belong to monetary unions. Moreover, when countries are in a crisis they benefit from being a member of a monetary union with an independent central bank. Results seem to point to the conclusion that Legal CBI in a monetary union has the potential to increase economic growth rates. (JEL codes: C23, E58, and O43)

Central bank independence and inflation volatility in developing countries

This paper analyzes the effects of legal central bank independence (CBI) on inflation volatility in developing countries. We discuss why CBI should curb inflation volatility, independently from its effect via lowering inflation levels. Empirical analyses in a sample of 96 developing countries between 1980 and 2014 show that CBI is directly and unconditionally associated with lower volatility. The magnitude of this effect is larger in more democratic countries even after accounting for the endogeneity of CBI and inflation. Our results are robust to alternative measurements of the main variables, different model specifications, and methodologies.

CENTRAL BANK INDEPENDENCE AND ECONOMIC GROWTH: EVIDENCE FROM ASEAN COUNTRIES

The rise of central bank independence (CBI) raises questions regarding the importance of CBI for economic growth. Where conventional theory focuses on the link between CBI and inflation as the common primary objective of any central bank is price stability, this paper explores the theoretical framework of CBI while making the connections to the potential impact it could have on economic growth especially in the context of the ASEAN region. Hence, the aim of this paper is to investigate the relevance of the CBI in the ASEAN region in comparison to the existing literature. Observing nine countries in the ASEAN region across 1996 to 2017, and using the Feasible Generalized Least Squares Method, the study found that the legal CBI has positive impact on economic growth, while the de facto CBI is not significant. The finding raises questions regarding how the economic agents perceive aspects of the CBI.

THE RELATION BETWEEN CENTRAL BANK INDEPENDENCE AND INFLATION RATE IN EGYPT: AN EMPIRICAL ANALYSIS DURING 1998-2019

This paper examines the relation between granting central banks more independence represented in both its manifested legal charter as well as actual practices adopted and inflation in Egypt during the period from 1998-2019. To do so, this paper first looks at the evolution of different central bank independence (CBI) measures and adopts the most comprehensive relevant one. Consequently, it runs a regression model adopting an autoregressive distributed lag (ARDL) model, regressing the dependent variable inflation on its determinants of legal CBI, actual CBI, M2 and openness, to capture such relation in both the short and long term time dimensions in the case of Egypt. The paper further provides an interpretation of computed outcomes, where it presents robust evidence of an inverse relation between inflation and CBI in Egypt in the period under study in its legal and actual form and in both the short-run and the long-run. Keywords: Central bank independence, Central Bank of Egypt, Inflation, Autoregressive distributed lag, unit root testJEL Classifications: E31, E42, E58, E370DOI: https://doi.org/10.32479/ijefi.10941

Financial globalization and institutions in Africa: the case of foreign direct investment, central bank independence and political institutions

AbstractIn this paper, we examine the bi-directional relationship between financial globalization (proxied by foreign direct investment (FDI) flows) and economic institutions (proxied by central bank independence (CBI)) taking into consideration the role of political institutions. We test our argument on a sample of 48 African countries (1970–2012) using a two-step System Generalized Methods of Moments, with collapsed instruments and Windmeijer robust standard errors. Using two proxies for CBI, the study finds that while legal CBI does not have a significant impact on FDI, high central bank governor turnover rates have a significantly negative impact on FDI inflows. However, higher levels of political institutions significantly enhance the impact of legal CBI on FDI inflows, and dampen the impact of high central bank governor turnover rates on FDI inflows. The study also shows that, higher FDI inflows have a significantly positive impact on both legal andde factoCBI. This impact is accelerated in countries characterized by higher levels of political institutions.

The Case for Central Bank Independence: A Review of Key Issues in the International Debate

This Occasional Paper analyses how significant expansions in central banks’ mandates, roles and instruments can result in challenges to the independence of monetary policy. The paper reviews, in particular, some of the key challenges to central bank independence brought about by the global financial crisis (GFC) of 2007 and assesses their impact on the de jure and de facto independence of selected central banks around the world in the past few years. It finds that although the level of de jure (legal) central bank independence did not deteriorate, the level of de facto (actual) independence of the central banks of some of the largest economies in the world may have weakened. The paper presents counterarguments to the key critiques raised against central banks due to their policy response during the GFC, and concludes that the case for central bank independence is as strong as ever.

More effective than we thought: Central bank independence and inflation in developing countries

This study examines the effect of legal central bank independence on inflation in developing countries. In spite of the policy consensus suggesting that central bank independence is an effective tool to control inflation, the evidence is still limited, particularly for developing countries. Using a novel dataset, we analyze the effect of central bank independence on inflation for a sample of 118 developing countries between 1980 and 2013. We find that higher central bank independence is associated with lower inflation rates. This effect on inflation is stronger the more democratic a country is, but it is also present in non-democratic countries. Our results are robust to different specifications and methodologies. Furthermore, we find that all dimensions included in the measurement of central bank independence (objectives, personnel, policy, and financial independence) contribute to curb inflation. Our results shed light on which types of reforms may be more effective at fighting inflation in developing countries.

The rule of law, central bank independence and price stability

AbstractThis work empirically investigates the effect of the interaction between the rule of law and legal central bank independence (CBI) on price stability (the level of inflation and inflation volatility), employing a panel dataset that covers up to 124 countries over the period from 1970 to 2013. A new, largely complete legal CBI dataset, covering 182 countries was used for the work. The results indicate that the effect of legal CBI on price stability depends on the strength of the rule of law. Moreover, the results reveal that legal CBI has no significant effect on price stability when the rule of law is weak. The findings also show that 67% of advanced countries possess a rule of law that is strong enough to maintain price stability by increasing central bank autonomy, while only 4.5% of developing countries possess it.

Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?

Independent central banks prefer balanced budgets due to the long-run connection between deficits and inflation, and can enforce their preference through interest rate increases and denial of credit to the government. This article argues that legal central bank independence (CBI) deters fiscal deficits predominantly in countries with rule of law and impartial contract enforcement, a free press and constraints on executive power. It further suggests that CBI may not affect fiscal deficits in a counter-cyclical fashion, but instead depending on the electoral calendar and government partisanship. The article also tests the novel hypotheses using new yearly data on legal CBI for seventy-eight countries from 1970 to 2007. The results show that CBI restrains deficits only in democracies, during non-election years and under left government tenures.

Legal central bank independence and inflation in various phases of transition

The transition environment of 11 EU member countries has created an exceptional opportunity for research on the influence of legal central bank independence (LCBI) on inflation within significantly different circumstances in comparison to developed Western countries. I construct my own transformed GMT (TGMT) model for estimation of the LCBI, researching transition in its early stages and later on, thus comprising the total period of transition. Even in early stages of the transition LCBI has significantly negative effects on inflation. In later phases all the countries show evidently high levels of the LCBI and low inflation rates, but in this phase increasing the LCBI would not result in decreasing the inflation rate. Only studying the entire period of the transition would show that LCBI has significant negative influence on inflation, clearly showing different levels of the LCBI and inflation, which was not so obvious in shorter intervals. Moreover, negative influence of the LCBI on inflation does not change even if I add budget deficit as an independent variable to my research.

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

The Effect of Central Bank Independence on Price Stability: The Case of Indonesia

This paper investigates the relationship between central bank independence (CBI) and inflation in Indonesia during 1970-2006. Using partial adjustment Ordinary Least Square (OLS) and Engel Granger Error Correction Model, the result shows that legal CBI index inversely affect the inflation, while the turnover of governor is not significant. This result emphasizes Bank Indonesia to strengthen its independency in order to achieve his inflation target. Keywords: Central bank independency, Inflation, Error Correction Model.JEL Classification : C32, E58

THE EFFECT OF CENTRAL BANK INDEPENDENCE ON PRICE STABILITY: THE CASE OF INDONESIA

This paper investigates the relationship between central bank independence (CBI) and inflation in Indonesia during 1970-2006. Using partial adjustment Ordinary Least Square (OLS) and Engel Granger Error Correction Model, the result shows that legal CBI index inversely affect the inflation, while the turnover of governor is not significant. This result emphasizes Bank Indonesia to strengthen its independency in order to achieve his inflation target. Keywords: Central bank independency, Inflation, Error Correction Model.JEL Classification : C32, E58

Monetary Policy and Central Bank Independence in a Former Communist Country; Curious Evolutions in Romania

The subject of central bank independence has been the focus of debates during the 1990s and 2000s. It seems that consensus has been reached over the need to support high legal central bank independence in order to achieve price stability, and lower inflation rates. However, many doubt this institutional arrangement has the desired outcome in all cases and fear that cultural elements such as inflation aversion among citizens, tradition of rule of law and other factors may be more important. Romania, as member of the European Union, has to comply with the high legal central bank independence requirements. Despite the alleged progress of the National Bank of Romania, concerns regarding its real independence from the government still remain. The article explores the development of central bank independence in relation to monetary policy, in the case of Romania.

Income Inequality and Inflation in the EU

1. Introduction There is extended research analyzing relationship between income inequality and selected macroeconomic variables such as growth rate, inflation rate, openness etc. Azzoni (2001) has analyzed regional inequality in Brazil using data from period 1939-1995. Barro (2000) has used a panel data approach to investigate 100 countries for period 1960-1990. Bandelj and Mahutga (2010) have presented one of cross-national analyses of Central and Eastern European States after fall of communistic regimes. While Azzoni (2001) and Barro (2000) have focused on linkage of inequality and growth, Bandelj and Mahutga (2010) have assessed inequality and socio-economic changes. Beckfield (2009) has developed an argument that regional integration in Europe has affected economic inequality. Also Forbes (2000) has investigated relationship between inequality and growth. In this research data from 13 EU4 countries have been used from period 2000-2009 in an attempt to investigate relationship between income inequality and inflation. The paper is organized as follows: Section 2 gives a brief introduction to income inequality and inflation and outlines some related theoretical and empirical literature. Section 3 presents methodology and results while section 4 concludes research. 2. Inequality and Inflation The GINI coefficient is a widely used statistic for measuring inequality. It is derived from Lorenz curve and defined as ratio of area between Lorenz curve and perfect equality line. The Lorenz curve plots relation between cumulative percentage of population and proportion of total income earned by each cumulative percentage. The dependent variable is GINI coefficient; a common measure of inequality that varies from 0 to 1, where 0 presents perfect equality and 1 perfect inequality. As it is stated in Duro (2004) the GINI coefficient is more sensitive to income changes occurred at middle of income distribution, treating symmetrically lower and upper tails of incomes ranking. Due to fact that income distribution may have long run effects policy makers should be concerned with distributional implications of government policies. Also extent of inequality-inflation link is important in designing of stabilization programs as it is stated in Al-Mahrubi (2000). When unemployment rates increase it usually affect more people in lower tail of personal income distribution, thus lowering average per capita income (Levernier, et al., 1995). Checchi and Garcia-Penalosa (2008) argue that when unemployment rate is not too high unemployment and inequality linkage is positive. Beetsma and Van Der Ploeg (1996), Al-Mahrubi (1997), Romer and Romer (1998) and Albanesi (2001, 2007) have found a strong positive relation between inflation and inequality. Cardoso (1992) has concluded that inflation shifts wage profile. Bulif (1998) has used a cross-sectional approach regressing GINI coefficients and has found that higher inflation is associated with more inequality (Crowe, 2004). Milanovic (1994) argues about factors which determine income distribution. Factors are in short run, from point of view of policy makers or society as a whole given and by social (or public policy) choice. Milanovic (1994) tests hypothesis according to which government policies can significantly change income distribution and Kuznet holds. Al-Marhubi (1997) investigates inflation-inequality link by using positive political-economy approach and finds that countries which have a greater inequality have a higher average rate of inflation. The dependent variable which is used in Al-Mahrubi model is average annual inflation rate in log form and independents are GINI coefficient, openness, political instability, turnover of Central Bank Governors and legal Central Bank independence. …

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.

Central Bank independence and inflation: Evidence from emerging countries

This paper is mainly devoted to an empirical study of the legal and real independence of the Tunisian Central Bank as well as to estimating the correlation between the inflationary bias and the real independence of the emerging countries while applying new data sources. Our contribution consists, particularly, in measuring the indicators of legal and real Central Bank independence through applying, respectively, the Jacome (2001) and Cukierman's (1992) methods. In a second part, we are carrying out a descriptive and comparative analysis of inflation relative to the Maghreb countries designed to check the inflationary bias reduction. However, the third part is consecrated to the study of correlation between the real independence and the inflationary bias, performed over a sample of emerging countries with a panel estimation ranging over the period 1971–2004. Our results conform those achieved by Cukierman (1992), showing an acceptable proxy of the real and legal independence as well as the beneficial effects stemming from inflation. These findings conform those of De Haan (2007) and confirm a positive and non-significant correlation between real independence and inflation.

Is there any link between legal central bank independence and inflation? Evidence from Latin America and the Caribbean

This paper explores the effects of central bank independence (CBI) on inflation in a sample of 24 Latin American and Caribbean countries during 1985–2002. Using panel regressions, the paper finds a negative relationship between CBI and inflation. This result holds for three alternative measures of legal CBI, as well as for a measure of effective CBI, after controlling for international inflation, banking crises, and exchange rate regimes. However, the result is not entirely robust to the inclusion of an indicator of structural reforms that typically accompany changes in central bank legislation. In addition, evidence of causal relationship running from CBI to inflation is only supported by the results associated with the measure of effective CBI.

Is There Any Link between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean

Is There Any Link between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean