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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. Philip Keefer, 2001. "Politics and the Determinants of Banking Crises: the Effects of Political Checks and Balances," Working Papers Central Bank of Chile 119, Central Bank of Chile.
  2. 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.
  3. Jan-Egbert Sturm & Jakob de Haan, 2001. "Inflation in Developing Countries: Does Central Bank Independence Matter?," CESifo Working Paper Series 511, CESifo Group Munich.
  4. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
  5. Bernd Hayo & Stefan Voigt, 2003. "Explaining de facto judicial independence," ICER Working Papers 01-2004, ICER - International Centre for Economic Research.
  6. Sergio Clavijo, . "Central Banking and Macroeconomic Coordination: The Case of Colombia," Borradores de Economia 159, Banco de la Republica de Colombia.
  7. Cukierman, A. & Webb, S., 1994. "Political Influence on the Central Bank : International Evidence," Discussion Paper 1994-100, Tilburg University, Center for Economic Research.
  8. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
  9. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  10. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 1-31, 03.
  11. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
  12. 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.
  13. Feld, Lars P. & Voigt, Stefan, 2003. "Economic growth and judicial independence: cross-country evidence using a new set of indicators," European Journal of Political Economy, Elsevier, vol. 19(3), pages 497-527, September.
  14. 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.
  15. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, EconWPA.
  16. Sergio Clavijo, 2000. "Central Banking and Macroeconomic Coordination: The Case of Colombia," BORRADORES DE ECONOMIA 002113, BANCO DE LA REPÚBLICA.
  17. 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.
  18. 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.
  19. 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.
  20. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, vol. 43(8), pages 1569-1593, August.
  21. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
  22. Andreas Freytag, 2001. "Does central bank independence reflect monetary commitment properly? Methodical considerations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 181-208.
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Citations

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Cited by:
  1. Berggren, Niclas & Daunfeldt, Sven-Olof & Hellström, Jörgen, 2012. "Social Trust and Central-Bank Independence," Working Paper Series 920, Research Institute of Industrial Economics.
  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. Tuesta Vicente, 2007. "Independencia Legal y Efectiva del Banco Central de Reserva del Perú," Working Papers 2007-012, Banco Central de Reserva del Perú.
  4. 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.
  5. 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.
  6. 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.

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