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Do We Really Need Central Bank Independence? A Critical Re- examination

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  • Bernd Hayo

    (Georgetown University & University of Bonn)

  • Carsten Hefeker

    (University of Basel)

Abstract

In this survey, we critically review the argument for central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, CBI should not be treated as an exogenous variable, but instead attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems. Third, in a number of empirical studies, researchers found CBI is correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there is no reason to believe the correlation between CBI and low inflation tells us anything about causality.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0103006.

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Length: 31 pages
Date of creation: 21 Mar 2001
Date of revision:
Handle: RePEc:wpa:wuwpma:0103006

Note: Type of Document - PDF; prepared on IBM PC; pages: 31
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Web page: http://128.118.178.162

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Keywords: Central bank independence; monetary policy;

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References

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Cited by:
  1. Erixon, Lennart, 2011. "Under the influence of traumatic events, new ideas, economic experts and the ICT revolution - the economic policy and macroeconomic performance of Sweden in the 1990s and 2000s," Research Papers in Economics 2011:25, Stockholm University, Department of Economics.
  2. Theodore Panagiotidis & Afrodit Triampella, 2005. "Central Bank Independence and Inflation: The case of Greece," Discussion Paper Series 2005_7, Department of Economics, Loughborough University, revised Jul 2005.
  3. Stefan Voigt, 2011. "Positive constitutional economics II—a survey of recent developments," Public Choice, Springer, vol. 146(1), pages 205-256, January.
  4. Bernd Hayo & Stefan Voigt, 2005. "Inflation, Central Bank Independence and the Legal System," ICER Working Papers 02-2005, ICER - International Centre for Economic Research.
  5. 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.
  6. Masciandaro, Donato & Quintyn, Marc & Taylor, Michael W., 2008. "Inside and outside the central bank: Independence and accountability in financial supervision: Trends and determinants," European Journal of Political Economy, Elsevier, vol. 24(4), pages 833-848, December.
  7. Donato Masciandaro & Marc Quintyn & Michael Taylor, 2008. "Financial Supervisory Independence and Accountability-Exploring the Determinants," IMF Working Papers 08/147, International Monetary Fund.

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