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Measuring central bank independence: a latent variables approach

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  • Jakob de Haan
  • Erik Leertouwer
  • Erik Meijer
  • Tom Wansbeek

Abstract

We argue that central bank independence (CBI) is a latent variable of which the various existing quantifications are imperfect indicators. We show how factor analysis techniques can be employed to assess the quality of the various indicators, and how an optimal weighting of the indicators can be obtained that gives the best approximation of CBI. We also show how these results can be utilized in models in which CBI is an explanatory variable. In contrast to the well-known study of Campillo and Miron (1997) , we find that our CBI indicator is significantly related to inflation, also when various control variables are included. Copyright (c) Scottish Economic Society 2003.

Suggested Citation

  • Jakob de Haan & Erik Leertouwer & Erik Meijer & Tom Wansbeek, 2003. "Measuring central bank independence: a latent variables approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(3), pages 326-340, August.
  • Handle: RePEc:bla:scotjp:v:50:y:2003:i:3:p:326-340
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    Citations

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    Cited by:

    1. Erik Meijer & Susann Rohwedder & Tom Wansbeek, 2008. "Prediction of Latent Variables in a Mixture of Structural Equation Models, with an Application to the Discrepancy Between Survey and Register Data," Working Papers 584, RAND Corporation.
    2. Erik Leertouwer & Jakob de Haan, 2002. "How to Use Indicators for 'Corporatism' in Empirical Applications," CESifo Working Paper Series 728, CESifo Group Munich.
    3. Posso, Alberto & Tawadros, George B., 2013. "Does greater central bank independence really lead to lower inflation? Evidence from panel data," Economic Modelling, Elsevier, vol. 33(C), pages 244-247.
    4. Klomp, Jeroen & de Haan, Jakob, 2009. "Is the political system really related to health?," Social Science & Medicine, Elsevier, vol. 69(1), pages 36-46, July.
    5. Andreas Freytag & Simon Renaud, 2007. "From short-term to long-term orientation—political economy of the policy reform process," Journal of Evolutionary Economics, Springer, vol. 17(4), pages 433-449, August.
    6. M. Pilar Muñoz & Cristina Corchero & F.-Javier Heredia, 2013. "Improving Electricity Market Price Forecasting with Factor Models for the Optimal Generation Bid," International Statistical Review, International Statistical Institute, vol. 81(2), pages 289-306, August.
    7. C. Hueng, 2012. "Central Bank Behavior and Statutory Independence," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(2), pages 111-126, June.
    8. Weymark, Diana N., 2007. "Inflation, government transfers, and optimal central bank independence," European Economic Review, Elsevier, vol. 51(2), pages 297-315, February.
    9. Goran Petrevski & Jane Bogoev & Bruno Sergi, 2012. "The link between central bank independence and inflation in Central and Eastern Europe: are the results sensitive to endogeneity issue omitted dynamics and subjectivity bias?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(4), pages 611-652.

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