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Estimating the effect of central bank independence on inflation using longitudinal targeted maximum likelihood estimation

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  • Baumann Philipp F. M.

    (KOF Swiss Economic Institute, Department of Management, Technology, and Economics (D-MTEC), ETH Zurich, 8092 Zurich, Zurich, Switzerland)

  • Schomaker Michael

    (Institute of Public Health, Medical Decision Making and Health Technology Assessment, Department of Public Health, Health Services Research and Health Technology Assessment, UMIT - University for Health Sciences, Medical Informatics and Technology, Hall in Tirol, Austria)

  • Rossi Enzo

    (Swiss National Bank, Department I, 8022 Zurich, Zurich, Switzerland)

Abstract

The notion that an independent central bank reduces a country’s inflation is a controversial hypothesis. To date, it has not been possible to satisfactorily answer this question because the complex macroeconomic structure that gives rise to the data has not been adequately incorporated into statistical analyses. We develop a causal model that summarizes the economic process of inflation. Based on this causal model and recent data, we discuss and identify the assumptions under which the effect of central bank independence on inflation can be identified and estimated. Given these and alternative assumptions, we estimate this effect using modern doubly robust effect estimators, i.e., longitudinal targeted maximum likelihood estimators. The estimation procedure incorporates machine learning algorithms and is tailored to address the challenges associated with complex longitudinal macroeconomic data. We do not find strong support for the hypothesis that having an independent central bank for a long period of time necessarily lowers inflation. Simulation studies evaluate the sensitivity of the proposed methods in complex settings when certain assumptions are violated and highlight the importance of working with appropriate learning algorithms for estimation.

Suggested Citation

  • Baumann Philipp F. M. & Schomaker Michael & Rossi Enzo, 2021. "Estimating the effect of central bank independence on inflation using longitudinal targeted maximum likelihood estimation," Journal of Causal Inference, De Gruyter, vol. 9(1), pages 109-146, January.
  • Handle: RePEc:bpj:causin:v:9:y:2021:i:1:p:109-146:n:6
    DOI: 10.1515/jci-2020-0016
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