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Measuring the Degree of Central Bank Independence in Egypt

  • Noha Farrag


    (Faculty of Management Technology, The German University in Cairo)

  • Ahmed Kamaly


    (American University in Cairo)

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    The past few years have witnessed a trend of increased delegation of authority to central banks. Increasing central bank independence is a recommended strategy for governments to establish a credible commitment to price stability as the final objective of the monetary authority, even at the cost of other objectives that may be more appealing to the political authorities. Existing literature on measuring central bank independence focuses on developed countries where quantifying the independence of central banks is easier, since quantifying the legal charter is sufficient to reflect the degree of central bank independence. However, in developing countries this task is thorny as quantifying the legal charter is often insufficient, since laws are often incomplete, ambiguous, or simply not respected. Thus, quantifying other indicators that reflect actual practice is required to capture any divergence between legal and actual practices. This paper attempts to quantify the degree of independence in the central bank of Egypt (CBE), from both a legal and behavioural context, since its establishment in 1961 until 2004. The study uses four indices in line with the work of Jacome (2001), Cukierman, et al. (1992), and Cukierman and Webb (1995), where each index is designed in such a way to capture a somewhat different aspect of independence. This study captures the discrepancies between the degree of independence conferred to the CBE by law and actual practice. The empirical findings of this paper offers insights about the direction of efforts that should be made to enhance central bank independence which is the key to achieving price stability and the stability of the financial system in general.

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    Paper provided by The German University in Cairo, Faculty of Management Technology in its series Working Papers with number 4.

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    Length: 45 pages
    Date of creation: Dec 2007
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    Handle: RePEc:guc:wpaper:4
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    1. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
    2. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
    3. Luis Ignacio Jácome, 2001. "Legal Central Bank Independence and Inflation in Latin America During the 1990s," IMF Working Papers 01/212, International Monetary Fund.
    4. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
    5. Cukierman, Alex, 1994. "Central Bank Independence and Monetary Control," Economic Journal, Royal Economic Society, vol. 104(427), pages 1437-48, November.
    6. Clive Briault & Andrew Haldane & Mervyn King, 1996. "Independence and Accountability," Bank of England working papers 49, Bank of England.
    7. Cukierman, A., 1996. "The Economics of Central Banking," Papers 36-96, Tel Aviv.
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