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Central Bank Independence, Inflation Variability, and the Revenue Smoothing Hypothesis

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  • Hermann Sintim-Aboagye
  • David Tufte

Abstract

This paper examines the revenue-smoothing hypothesis, which posits that an optimizing government will adjust both taxes and inflation to meet shocks to government spending. Our contribution is to examine this through the lens of a new methodology that relates both the first and second moments of inflation rates to central bank independence (CBI) measures. Unlike existing least-squares-based CBI papers, this study uses a maximum likelihood framework that facilitates the direct inclusion of CBI parameters in the residual covariance matrix. This new approach allows for a more intensive use of information contained in the CBI indexes and the estimates obtained are better reflective of CBI influences. Our results provide stronger evidence confirming the revenue-smoothing hypothesis, in particular for those countries with more independent central banks. Copyright Springer Science+Business Media, Inc. 2006

Suggested Citation

  • Hermann Sintim-Aboagye & David Tufte, 2006. "Central Bank Independence, Inflation Variability, and the Revenue Smoothing Hypothesis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 12(2), pages 147-160, May.
    • Handle: RePEc:kap:iaecre:v:12:y:2006:i:2:p:147-160:10.1007/s11294-006-9000-z
    DOI: 10.1007/s11294-006-9000-z
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    Cited by:

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    Keywords

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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