Central Bank Independence and Effectiveness of Monetary Policy in Sub-Saharan Economies: Which Mechanism? (original) (raw)
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Measuring the Statutory Independence of Sub-Saharan Africa Central Banks
Eastern Africa Social Science Research Review, 2014
This study evaluated the degree of legal independence of 14 Sub-Saharan Africa central banks using the CWN (1992) approach. Central bank independence, i.e. freedom from political pressure in the conduct of monetary policy, is an attempt to overcome the inflationary bias inherent in the trade-off between inflation and unemployment reflected in the Phillips curve. Comprising,
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.
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
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.
Social Science Research Network, 2013
A sufficient and appropriate degree of central bank independence is widely acknowledged to be necessary for the goal of achieving price stability. However, despite the levels of independence claimed to be enjoyed by several central banks, recent events indicate shifts in focus of monetary policy objectives by various prominent central banks. The impact of political and government influences on central banks' monetary policies has been evidenced from the recent financial crisis-and in several jurisdictions. Many central banks have adjusted monetary policies having been influenced by political pressures which have built up as a result of the recent crises. However such lack of absolute independence (from political spheres) could prove symbiotic in the sense that, despite the need for a certain degree of independence from political interference, certain events which are capable of devastating consequences, namely, a drastic disruption of the system's financial stability, need to be responded to as quickly and promptly as possible. Is it possible for a central bank with absolute independence to operate effectively-particularly given the close links between many central banks and their Treasury in several countries? It may be inferred that central banks' crucial roles in establishing a macro prudential framework provide the key to bridging the gap between macro economic policy and the regulation of individual financial institutions. This however, on its own, is insufficient-close collaboration and effective information sharing between central banks and regulatory authorities is paramount.
SSRN Electronic Journal, 2000
A sufficient and appropriate degree of central bank independence is widely acknowledged to be necessary for the goal of achieving price stability. However, despite the levels of independence claimed to be enjoyed by several central banks, recent events indicate shifts in focus of monetary policy objectives by various prominent central banks. The impact of political and government influences on central banks' monetary policies has been evidenced from the recent financial crisis-and in several jurisdictions. Many central banks have adjusted monetary policies having been influenced by political pressures which have built up as a result of the recent crises. However such lack of absolute independence (from political spheres) could prove symbiotic in the sense that, despite the need for a certain degree of independence from political interference, certain events which are capable of devastating consequences, namely, a drastic disruption of the system's financial stability, need to be responded to as quickly and promptly as possible. Is it possible for a central bank with absolute independence to operate effectively-particularly given the close links between many central banks and their Treasury in several countries? It may be inferred that central banks' crucial roles in establishing a macro prudential framework provide the key to bridging the gap between macro economic policy and the regulation of individual financial institutions. This however, on its own, is insufficient-close collaboration and effective information sharing between central banks and regulatory authorities is paramount.
Measuring the Independence of Central Banks and Its Effect on Policy Outcomes
World Bank Economic Review, 1992
Making the central bank an agency with the mandate and reputation for maintaining price stability is a means by which a government can choose the strength of its commitment to price stability. This article develops four measures of central bank independence and explores their relation with inflation outcomes. An aggregate legal index is developedforfour decades in 72 countries. Three indicators of actual independence are developed: the rate of turnover of central bank governors, an index based on a questionnaire answered by specialists in 23 countries, and an aggregation of the legal index and the rate of turnover.
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.
The limits of central bank independence for inflation performance
Public Choice, 2020
Introduction History Empirics Results Conclusion Motivation Contribution Objective Relevant Literature Central bank governors and their independence What do these three besuited individuals have in common? (Other than the obvious fact that they are all men with slightly pained looks on their faces) Lim Central Bank Independence 2/30 Introduction History Empirics Results Conclusion Motivation Contribution Objective Relevant Literature Central bank governors and their independence What do these three besuited individuals have in common? (Other than the obvious fact that they are all men with slightly pained looks on their faces) Lim Central Bank Independence 3/30 Introduction History Empirics Results Conclusion Motivation Contribution Objective Relevant Literature The importance of central bank independence in theory and practice Central bank independence is the lynchpin of academic belief in credible monetary policymaking This argument is the hallmark of economists' pushback against recent threats to central bank governance It has also been almost unambiguously been embraced by governments worldwide Independent monetary authorities also represent an inherent tension in democracies They outsource a powerful policy instrument to unelected bureaucrats But a transparent monetary commitment also complements democratic transparency Lim Central Bank Independence They outsource a powerful policy instrument to unelected bureaucrats But a transparent monetary commitment also complements democratic transparency Lim Central Bank Independence Multiple veto players in democracies can affect the effectiveness of central bank independence and its inflationary stance (Keefer & Stasavage 2002, 2003) Independence is a transparent monetary commitment that can reinforce the transparency of democratic systems to produce low-inflation outcomes (Broz 2002) Democracies that emphasize rule of law while allowing independent central banking offer the discipline and credibility necessary for low inflation (Bodea & Hicks 2015) Lim Central Bank Independence Relying on interactions misses the way democracies decentralize societal decisionmaking Decentralized policymaking applies to monetary policy too Democracies exhibit an average independence score of 1.7 versus 1.5 for nondemocracies Democracy positively correlated with independence Recognizing this relationship (and the absence of one with respect to inflation) unlocks the relevance of democracy as an instrument for independence Lim Central Bank Independence 5/30 Introduction History Empirics Results Conclusion Motivation Contribution Objective Relevant Literature Exploiting the explanatory power of democracy to isolate independence effect Relying on interactions misses the way democracies decentralize societal decisionmaking Decentralized policymaking applies to monetary policy too Democracies exhibit an average independence score of 1.7 versus 1.5 for nondemocracies Democracy positively correlated with independence Recognizing this relationship (and the absence of one with respect to inflation) unlocks the relevance of democracy as an instrument for independence Lim Central Bank Independence Expanded spatial-temporal coverage necessitates extra attention to parameter heterogeneity alongside endogeneity Lim Central Bank Independence Subsamples by income level Decompose central bank independence Clarify transmission channels via interaction effects Variability of inflation Lim Central Bank Independence Subsamples by income level Decompose central bank independence Clarify transmission channels via interaction effects Variability of inflation Lim Central Bank Independence Inflation Democracy Source: Author's calculations, from World Bank (2018) and Marshall, Gurr & Jaggers (2015) Lim Central Bank Independence Implication: Clear endogeneity problem that has to be resolved for appropriate inference (Brumm 2011; Crowe & Meade 2008) Lim Central Bank Independence Implication: Clear endogeneity problem that has to be resolved for appropriate inference (Brumm 2011; Crowe & Meade 2008) Lim Central Bank Independence Panel specification includes either fixed effects or multifactor error structure to absorb additional unobserved heterogeneity Robustness check includes level of development as additional control in first stage (higher per capita incomes operate through wide range of channels) Lim Central Bank Independence World Development Indicators International Financial Statistics World Bank Commodity Database Main dependent: CPI inflation Main independent: De jure central bank independence (Garriga 2016
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.