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On the determinants of Central Bank independence in open economies

  • Marcello D'Amato

    (Universit� di Salerno, Csef, Celpe, Italy)

  • Barbara Pistoresi

    (Universit� di Modena e Reggio Emila, ReCent, Italy)

  • Francesco Salsano

We test some positive implications of the commitment hypothesis for the design of monetary institutions in open economies, by studying the determinants of Central Bank independence on a sample of 55 countries, for the period 1980-1989. We document fairly consistent empirical evidence in support of the hypothesis that strategic commitment is indeed important to understand cross-country variation in the level of Central Bank degree of dependence. We also address the related question why only highly industrialized countries have relied on such a solution to the inflationary bias of monetary policy whereas other countries have not. Data suggest that the answer is related to the presence and the size of world-wide common features in the business cycle at country level. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.360
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 2 ()
Pages: 107-119

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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:2:p:107-119
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  1. Geraats, Petra M., 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Center for International and Development Economics Research, Working Paper Series qt0hw7h7cp, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
  3. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  4. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
  5. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  6. Dolado, Juan J. & Griffiths, Mark & Padilla, Atilano Jorge, 1993. "Delegation in International Monetary Policy Games," CEPR Discussion Papers 761, C.E.P.R. Discussion Papers.
  7. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  8. repec:bil:bilpap:973 is not listed on IDEAS
  9. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-79, April.
  10. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  11. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
  12. Robert J. Barro, 1982. "Inflationary Finance under Discrepion and Rules," NBER Working Papers 0889, National Bureau of Economic Research, Inc.
  13. Fershtman, Chaim & Kalai, Ehud, 1997. "Unobserved Delegation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 763-74, November.
  14. D'Amato, Marcello & Martina, Riccardo, 2005. "Credibility and commitment of monetary policy in open economies," European Journal of Political Economy, Elsevier, vol. 21(4), pages 872-902, December.
  15. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
  16. Farvaque, Etienne, 2002. "Political determinants of central bank independence," Economics Letters, Elsevier, vol. 77(1), pages 131-135, September.
  17. James M. Poterba & Julio J. Rotemberg, 1988. "Inflation And Taxation With Optimizing Governments," NBER Working Papers 2567, National Bureau of Economic Research, Inc.
  18. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
  19. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  20. Bagheri, Fatholla M & Habibi, Nader, 1998. " Political Institutions and Central Bank Independence: A Cross-Country Analysis," Public Choice, Springer, vol. 96(1-2), pages 187-204, July.
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