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Central Bank Reform, Liberalization and Inflation in Transition Economies - An International Perspective

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Author Info
Cukierman, Alex
Miller, Geoffrey
Neyapti, Bilin

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Abstract

This Paper develops extensive new indices of legal independence (Central Bank Independence, or CBI) for new central banks in 26 former socialist economies (FSEs). The indices reveal that central bank reform in the FSE during the 1990s has been quite ambitious. In spite of large price shocks, reformers in those countries have chosen to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the 1980s. The evidence in the Paper shows that CBI is unrelated to inflation during the early stages of liberalization. But with sufficiently high and sustained levels of liberalization, and controlling for other variables, legal CBI and inflation are significantly and negatively related. These findings are consistent with the view that even high CBI cannot contain the initial powerful inflationary impact of removing price controls. But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in reducing inflation. The Paper also presents evidence on factors that affect the choice of CBI and it examines the relation between inflation and CBI in a broader sample.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2808.

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Date of creation: May 2001
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Handle: RePEc:cpr:ceprdp:2808

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Related research
Keywords: Central Banks; Inflation; Legal Independence; Reform; Transition Economies;

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Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
K20 - Law and Economics - - Regulation and Business Law - - - General
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  2. 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.
    Other versions:
  3. Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-99, August.
    Other versions:
  4. Conway, P, 1995. "Currency Proliferation : The Monetary Legacy of the Soviet Union," Princeton Essays in International Economics 197, International Economics Section, Departement of Economics Princeton University,.
  5. Hochreiter, Eduard & Rovelli, Riccardo & Winckler, Georg, 1996. "Central banks and seigniorage: A study of three economies in transition," European Economic Review, Elsevier, vol. 40(3-5), pages 629-643, April. [Downloadable!] (restricted)
  6. Cukierman, A., 1996. "The economics of central banking," Discussion Paper 31, Tilburg University, Center for Economic Research. [Downloadable!]
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  7. 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. [Downloadable!] (restricted)
  8. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, Oxford University Press, vol. 6(3), pages 353-98, September.
  9. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May. [Downloadable!] (restricted)
  10. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc. [Downloadable!]
  11. Conway, P, 1995. "Currency Proliferation : The Monetary Legacy of the Soviet Union," Princeton Studies in International Economics 197, International Economics Section, Departement of Economics Princeton University,.
  12. Bilin Neyaptý, 2000. "Central bank Independence and Economic Performance in Eastern Europe," Departmental Working Papers 0007, Bilkent University, Department of Economics.
    Other versions:
  13. Eijffinger, S. & van Keulen, M., 1994. "Central Bank Independence in Another Eleven Countries," Papers 9494, Tilburg - Center for Economic Research.
  14. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
    Other versions:
  15. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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