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Inflation, Central Bank Independence and the Legal System

  • Bernd Hayo

    ()

  • Stefan Voigt

    ()

We argue that a higher degree of de facto independence of the legal system from the other government branches as well as public trust in the legal system may reduce the average inflation record of countries through a direct and an indirect channel. The direct channel works by affecting potential output, while the indirect channel helps to increase the de facto independence of the central bank. In the empirical section of the paper, we present evidence in favor of both channels in a sample containing both industrial and Third World countries. A model that contains legal trust in addition to de jure central bank independence, checks and balances within government, and openness can explain 60% of the variation in the logarithm of the inflation rate.

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File URL: http://servizi.sme.unito.it/icer_repec/RePEc/icr/wp2005/ICERwp2-05.pdf
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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 02-2005.

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Length: 29 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:icr:wpicer:02-2005
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  4. Bernd Hayo and Stefan Voigt, 2005. "Explaining de facto Judicial Independence," Marburg Working Papers on Economics 200507, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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  18. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
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