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Social Trust and Central-Bank Independence

  • Berggren, Niclas

    ()

    (Research Institute of Industrial Economics (IFN))

  • Daunfeldt, Sven-Olof

    ()

    (HUI Research AB)

  • Hellström, Jörgen

    (Umeå 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 Research Institute of Industrial Economics in its series Working Paper Series with number 920.

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Length: 25 pages
Date of creation: 23 May 2012
Date of revision:
Publication status: Forthcoming as Berggren, Niclas, Sven-Olof Daunfeldt and Jörgen Hellström, 'Social Trust and Central-Bank Independence' in European Journal of Political Economy.
Handle: RePEc:hhs:iuiwop:0920
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Phone: +46 8 665 4500
Fax: +46 8 665 4599
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