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The limits of central bank independence for inflation performance

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  • Jamus Jerome Lim

    (ESSEC Business School)

Abstract

The independence of the central bank is routinely regarded as sacrosanct, at least for governments wishing to maintain credible monetary policy to meet inflation objectives. Yet empirical efforts to ascertain that routine economic policy advice are complicated by the endogeneity of inflation and independence. Using a large panel of up to 147 economies between 1970 and 2012, we revisit the claim that central bank independence leads to superior inflation outcomes from the perspective of democratic governance. We deploy a measure of the degree of democratic representation as an instrument for the independence of the monetary authority and obtain estimates of the causal effect of central bank independence on inflation. Our baseline results overturn the standard negative inflation-independence relationship. Further inquiry into parameter heterogeneity indicates that the result is driven by developing economies and is attributable to political-economy factors: insufficient transparency enables the pursuit of non-price-stabilization objectives.

Suggested Citation

  • Jamus Jerome Lim, 2021. "The limits of central bank independence for inflation performance," Public Choice, Springer, vol. 186(3), pages 309-335, March.
  • Handle: RePEc:kap:pubcho:v:186:y:2021:i:3:d:10.1007_s11127-019-00771-8
    DOI: 10.1007/s11127-019-00771-8
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    More about this item

    Keywords

    Central bank independence; Inflation; Democracy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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