Central Bank Independence and Inflation: The Matters of Financial Development and Institutional Quality (original) (raw)
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Central Bank independence and inflation: Evidence from emerging countries
Journal of Policy Modeling, 2011
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 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 , 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. Published by Elsevier Inc. on behalf of Society for Policy Modeling
Effects of central bank independence in developing countries
2020
This thesis is composed of three empirical studies on the effect of central bank independence in developing countries. The first empirical study in Chapter 2 investigates the relationship between CBI and inflation in developing countries. After estimating a panel regression model, using pooled least square on the assumption of coefficient homogeneity; the result reveals that there is no significant negative relationship between CBI and inflation. The poolability of the panel is checked by applying the Chow test and Roy-Zellner test. The results show that the model is not poolable. Furthermore, by performing a panel heterogeneity model with pooled mean group (PMG) estimator and show that there exists a reverse relationship between CBI and inflation. Chapter 3 presents the responses to financial asset prices, consumption and investment in relation to CBI shocks in developing countries. The financial asset prices are divided into three categories: exchange rate, stock index and bond yi...
Central Bank Review, 2017
The study examines the effects of financial systems and the quality of political institutions on the effectiveness of central bank independence in achieving lower inflation. Drawing from the fiscal theory of price level (FTPL) and political economy of macroeconomic policy (PEMP) literature; we estimate a panel regression model, using Two Stage Least Squares instrumental variables procedure, on a sample of 48 African countries over the period 1970e2012. The study finds that central bank independenceinflation nexus is dependent on the model, sample and estimation technique used. After accounting for various control variables and introducing inflation targeting as an additional explanatory variable, the study shows that, unlike in developed countries, CBI is not sufficient in achieving lower inflation in Africa and the developing world. However, common to developed, developing and African countries, is that, higher central bank independence is more effective in lowering inflation in the presence of high levels of banking sector development and institutional quality. The findings of the study also show that while stock market development enhances the effectiveness of CBI in developed and developing countries, it has no significant effect on CBI effectiveness in Africa.
Abstracts 1. New gap (improved index and how they react to inflation), there is changes and update of the index over times Arnone 2006 and J (2008) and changes of the institutions.. in both emerging and developing countreis, Arnone 2006 2. CBI may not necessary ensure lower inflation, Klomp and De haan (2010) but should be a conditions under which search predictions may hold Posen 3. Posen (1993) argues that, the causal relationship between CBI and inflation, is explained by a third factor which he terms financial opposition to inflation. Central banks' decisions do not only reflect their institutional capabilities and legal constraints, but that such determinations also respond to the political environment. Therefore, the central bank can guarantee price stability only as long as the financial sector is ready to support policies associated with reducing inflation: that is, the more developed the financial sector, the more successful will be stabilization policies, throug lwer inters rates, good corporate governance checks on the central bank, reduces the crowding out effect of limited finance 4. Infter math financial crisis central banks around the expended their beyond traditional target of inflation and use of policy rates, sacrificing polical in support of operational independence to archieve pre and post targets, because the letter is not correlated with inflationary pressure in developed countries
Central Bank Independence and its Effect on Inflation Performance in the ESCWA Countries, 2011
In this study, we measured the central bank independence for all fourteen ESCWA countries using two indicators: the legal independence and accountability measure (the de jure measure) and the turnover rates of central bank governors (the de facto measure). The entire sample of countries is split into two subsamples: oil exporting and oil importing countries. The legal index shows that the central banks of Iraq and Palestine are the most independent central banks, while the central banks of Sudan and Syria are the least independent among both the oil exporting and oil importing countries respectively. The de facto measure shows that the central banks of Kuwait and Jordan are the most independent central banks while the central banks of Sudan and Egypt are the least independent among the oil exporting and the oil importing countries respectively. Our study reveals that the central bank independence has improved remarkably in the region since the 1980s and has closely followed the worldwide trend of granting central banks more independence from the executive branch. Our regression analysis proves that a higher degree of central bank independence would statistically improve the inflation performance in the entire region and in the two subsamples, basically by lowering the inflation rates level and decreasing volatility. Finally, our study pinpoints the legally weak provisions that contribute to low degrees of central bank independence; the study also recommends specific amendments that would significantly improve said independence in individual countries, the two subsamples, and the entire region.
Does greater central bank independence really lead to lower inflation? Evidence from panel data
Economic Modelling, 2013
It has long been held that central bank independence (CBI) from political control is a necessary requirement to curb inflation. In recent times, however, this long held belief has been challenged. Using a recently compiled panel data set on central bank independence measures, the proposition that greater CBI leads to lower inflation is tested, using latent variable analysis. The use of this alternative econometric technique, along with two additional indicators that capture more appropriately the degree of de facto independence, leads to empirical results that are highly supportive of the negative relationship between CBI and inflation, thereby restoring faith in the conventionally held wisdom, that greater CBI is needed to lower inflation.
Central Bank Independence, Economic Growth and Inflation: Theories and Empirical Validations
International Journal of Applied Economics, Finance and Accounting
Economics theory's assumption is that a central bank's independence from political power entails a split between political and monetary power. Such a split is unavoidable in order to control price instability without harming other macroeconomic variables such as growth or unemployment. The theory calling for central bank autonomy, started as early as the 1970s and still gaining ground, assumes the role of central banks as an arrangement sin qua non for tying the hands of government and consequently reducing inflationary bias, or even eliminating this scourge. Moreover, such a debate is mostly relevant for monetary policy, because of its inherent incredibility. Then, our aim in this study is to test the relevance of an anti-inflationary policy, reflected in freeing the central bank from the grip of political power, to combat inflation. To this end, we examine samples of developed countries (20 countries) and developing countries (37 countries) observed over the two study periods 1997-2006 and 2007-2016. We found that high-inflation countries and atypical countries biased our results, for both inflation rates and variability. This finding remains valid even after the introduction of a set of political and economic variables likely to affect inflation.
Central bank independence and governance in the South Asia
Asian Business Research Conference Proceedings, 2009
This paper constructs the central bank independence and governance (CBIG) index for eight South Asian countries and examines their relationship with inflation. This CBIG index is constructed following the unique model developed by . This index consists of total 26 variables; all variables together form the overall index and different sub-sets of these variables construct sub-indices (eg. legal; political; price stability objectives; exchange rate policy; monetary policy and deficit financing; and accountability and transparency).
Quest for the best: How to measure central bank independence and show its relation with inflation?
Discussion Papers, 2008
The objective of this paper is to check measures for explanatory power of central bank independence (CBI) in a series of econometric tests. Measures of central bank autonomy offer a useful expression of the extent to which a central bank is able to keep the government away from influencing a change in the inflation rate. The more a measure represents this idea, the more easily one can find a relation between the CBI value and the inflation rate. Results of estimations show that proxies by Grilli et al. (1991) are strong regressors of inflation rate, contrary to those by Cukierman et al. (1992). Moreover, estimation results challenge the belief that divergences in CBI-inflation rate estimations are due to differences in institutional features across samples of countries, not to differences in legal proxies of central bank independence. Already results from a homogenous group of industrial countries indicate that some indices perform ``better'' than others. Keywords: central bank independence, political autonomy, economic autonomy, institution, estimation JEL codes: E58, E52