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Central Bank Independence, Inflation, and Growth in Transition Economies

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  • Loungani, Prakash
  • Sheets, Nathan

Abstract

This paper documents two empirical relationships that have emerged as the former communist countries have taken steps to transform their economies. First, data from a sample of twelve transition economies suggest that increased central bank independence (CBI) is correlated with lower inflation rates. This CBI-inflation correlation is not well explained by initial economic conditions and persists after controlling for fiscal performance and the overall quality of economic reforms. Second, across a larger set of twenty-five transition economies, there is a strong and robust negative relationship between inflation and subsequent real GDP growth. Inflation's adverse effect on investment appears to be one significant channel through which the relationship between inflation and growth arises. Copyright 1997 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 29 (1997)
Issue (Month): 3 (August)
Pages: 381-99

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Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:3:p:381-99

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Posen, Adam, 1998. "Central Bank Independence and Disinflationary Credibility: A Missing Link?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 335-59, July.
  2. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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  5. Jakob De Haan & Jan Egbert Sturm, 1992. "The Case for Central Bank Independence," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 45(182), pages 305-327.
  6. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  7. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.).
  8. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  9. Vincent Koen & Michael Marrese, 1995. "Stabilization and Structural Change in Russia, 1992-94," IMF Working Papers 95/13, International Monetary Fund.
  10. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  11. Guy Debelle, 1996. "Central Bank Independence," IMF Working Papers 96/1, International Monetary Fund.
  12. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  13. Vincent Koen & Steven Phillips, 1992. "Price Liberalization in Russia," IMF Working Papers 92/92, International Monetary Fund.
  14. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  15. Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 95-140, December.
  16. Ramon Moreno, 1994. "Explaining Asia's low inflation," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov4.
  17. Gregory W. Huffman, 1995. "An equilibrium analysis of central bank independence and inflation," Working Papers 9501, Federal Reserve Bank of Dallas.
  18. Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers 0303, National Bureau of Economic Research, Inc.
  19. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-06, May.
  20. Stanley Fischer, 1995. "The Unending Search for Monetary Salvation," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 275-298 National Bureau of Economic Research, Inc.
  21. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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