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Central Bank Independence, Inflation, and Growth in Transition Economies

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  • Loungani, Prakash
  • Sheets, Nathan

Abstract

This paper documents two empirical relationships that have emerged as the former communist countries have taken steps to transform their economies. First, data from a sample of twelve transition economies suggest that increased central bank independence (CBI) is correlated with lower inflation rates. This CBI-inflation correlation is not well explained by initial economic conditions and persists after controlling for fiscal performance and the overall quality of economic reforms. Second, across a larger set of twenty-five transition economies, there is a strong and robust negative relationship between inflation and subsequent real GDP growth. Inflation's adverse effect on investment appears to be one significant channel through which the relationship between inflation and growth arises. Copyright 1997 by Ohio State University Press.

Suggested Citation

  • Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-399, August.
    • Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:3:p:381-99
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