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Central Bank Reform, Liberalization and Inflation in Transition Economies - An International Perspective

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  • Cukierman, Alex
  • Miller, Geoffrey
  • Neyapti, Bilin

Abstract

This Paper develops extensive new indices of legal independence (Central Bank Independence, or CBI) for new central banks in 26 former socialist economies (FSEs). The indices reveal that central bank reform in the FSE during the 1990s has been quite ambitious. In spite of large price shocks, reformers in those countries have chosen to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the 1980s. The evidence in the Paper shows that CBI is unrelated to inflation during the early stages of liberalization. But with sufficiently high and sustained levels of liberalization, and controlling for other variables, legal CBI and inflation are significantly and negatively related. These findings are consistent with the view that even high CBI cannot contain the initial powerful inflationary impact of removing price controls. But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in reducing inflation. The Paper also presents evidence on factors that affect the choice of CBI and it examines the relation between inflation and CBI in a broader sample.

Suggested Citation

  • Cukierman, Alex & Miller, Geoffrey & Neyapti, Bilin, 2001. "Central Bank Reform, Liberalization and Inflation in Transition Economies - An International Perspective," CEPR Discussion Papers 2808, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2808
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    More about this item

    Keywords

    Central Banks; Inflation; Legal Independence; Reform; Transition Economies;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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