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Social trust and central-bank independence

  • Berggren, Niclas

    (Research Institute of Industrial Economics (IFN))

  • Daunfeldt, Sven-Olov

    ()

    (HUI Research)

  • Hellström, Jörgen

    (Umea School of Business and Economics)

Central banks have been made more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm that there is such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust levels, the need for central-bank independence is strong enough to dominate the low ability; at high trust levels the ability for reform is high and dominates the low need; at intermediate trust levels there is neither need nor ability strong enough to generate very independent central banks.

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Paper provided by HUI Research in its series HUI Working Papers with number 66.

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Length: 23 pages
Date of creation: 22 May 2012
Date of revision:
Handle: RePEc:hhs:huiwps:0066
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