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Central bank independence and disinflationary credibility: a missing link?

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  • Adam Posen

Abstract

Granting central banks independence from short-term political control is widely assumed to decrease inflation by increasing the credibility of commitments to price stability. This paper analyzes public- and private-sector behavior in a sample of seventeen OECD countries for evidence of variations in disinflationary credibility with monetary institutions. The paper does not find evidence that the costs of disinflation are lower in countries with independent central banks, even when differences in contracting behavior are taken into account. It also does not find evidence that central bank independence inhibits government collection of seignorage revenues or manipulation of economic policy for electoral gain. These results raise questions about some explanations of the negative correlation between central bank independence and inflation, as well as the empirical relevance of government time-inconsistency problems as a source of inflation differences.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 1.

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Date of creation: 1995
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Handle: RePEc:fip:fednsr:1

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Related research

Keywords: Banks and banking; Central ; Inflation (Finance) ; Monetary policy;

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