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Inflation, Central Bank Independence, and the Legal System

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  • Bernd Hayo
  • Stefan Voigt

Abstract

We argue that a higher degree of de facto independence of the legal system from other government branches as well as strong public trust in the working of the legal system may reduce the average inflation rate of countries through two channels: by lowering transaction costs in the economy and by strengthening de facto central bank independence. In the empirical section of the paper, we present evidence in favour of both channels after controlling for other influences in a sample containing both developed and less-developed countries.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 164 (2008)
Issue (Month): 4 (December)
Pages: 751-777

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200812)164:4_751:icbiat_2.0.tx_2-l

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References

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  1. Bevger, H. & Haan, J. de & Eijffinger, S.C.W., 2000. "Central Bank Independence: An Update of Theory and Evidence," Open Access publications from Tilburg University urn:nbn:nl:ui:12-82768, Tilburg University.
  2. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  3. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  4. Jan-Egbert Sturm & Jakob de Haan, 2001. "Inflation in Developing Countries: Does Central Bank Independence Matter?," CESifo Working Paper Series 511, CESifo Group Munich.
  5. Lars P. Feld & Stefan Voigt, 2003. "Economic Growth and Judicial Independence: Cross Country Evidence Using a New Set of Indicators," CESifo Working Paper Series 906, CESifo Group Munich.
  6. Alex Cukierman & Steven Webb, 1995. "Political Influence on the Central Bank- International Evidence," University of Chicago - George G. Stigler Center for Study of Economy and State 114, Chicago - Center for Study of Economy and State.
  7. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  8. Andreas Freytag, 2001. "Does central bank independence reflect monetary commitment properly? Methodical considerations," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 181-208.
  9. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, vol. 43(8), pages 1569-1593, August.
  10. Sergio Clavijo, . "Central Banking and Macroeconomic Coordination: The Case of Colombia," Borradores de Economia 159, Banco de la Republica de Colombia.
  11. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
  12. Bernd Hayo and Stefan Voigt, 2005. "Explaining de facto Judicial Independence," Marburg Working Papers on Economics 200507, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  13. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  14. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  15. Forder, James, 1998. "The case for an independent European central bank: A reassessment of evidence and sources," European Journal of Political Economy, Elsevier, vol. 14(1), pages 53-71, February.
  16. 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.
  17. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, EconWPA.
  18. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 1-31, 03.
  19. Sergio Clavijo, 2000. "Central Banking and Macroeconomic Coordination: The Case of Colombia," BORRADORES DE ECONOMIA 002113, BANCO DE LA REPÚBLICA.
  20. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
  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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Citations

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Cited by:
  1. Voigt, Stefan & Gutmann, Jerg, 2013. "Turning cheap talk into economic growth: On the relationship between property rights and judicial independence," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 66-73.
  2. Marc Quintyn, 2009. "Independent agencies: more than a cheap copy of independent central banks?," Constitutional Political Economy, Springer, vol. 20(3), pages 267-295, September.
  3. Berggren, Niclas & Daunfeldt, Sven-Olov & Hellström, Jörgen, 2012. "Social trust and central-bank independence," HUI Working Papers 66, HUI Research.
  4. Mark Mietzner & Dirk Schiereck, 2011. "Staatsfonds als Ankerinvestoren: Eine Note zum Einstieg von Aabar bei Daimler," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(1), pages 92-100, 02.
  5. Kai Hielscher & Gunther Markwardt, 2011. "The Role of Political Institutions for the Effectiveness of Central Bank Independence," CESifo Working Paper Series 3396, CESifo Group Munich.
  6. Tuesta Vicente, 2007. "Independencia Legal y Efectiva del Banco Central de Reserva del Perú," Working Papers 2007-012, Banco Central de Reserva del Perú.

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