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Monetary Commitment, Institutional Constraints and Inflation: Empirical Evidence for OECD Countries since the 1970s

  • Andreas Freytag

    ()

    (University of Jena, School of Busniess and Economics)

  • Friedrich Schneider

    ()

    (Department of Economics, Johannes Kepler University Linz)

Central bank independence (CBI) is a very important precondition for price stability. However, the empirical evidence for a correlation between both is relatively weak. In this paper, this weakness is countered with a) an extended measure of monetary commitment, which includes well-known criteria for CBI and external criteria such as convertibility and exchange rate regimes and b) the argument that monetary commitment can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment with data from four decades confirms the crucial role of monetary commitment for price stability.

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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2007-002.

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Date of creation: 30 Mar 2007
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Handle: RePEc:jrp:jrpwrp:2007-002
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  1. 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.
  2. Andreas Freytag, 2001. "Does central bank independence reflect monetary commitment properly? Methodical considerations," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 181-208.
  3. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2000. "Central Bank Independence: An Update of Theory and Evidence," CEPR Discussion Papers 2353, C.E.P.R. Discussion Papers.
  4. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
  5. Jean-François Segalotto & Marco Arnone & Bernard Laurens, 2006. "Measures of Central Bank Autonomy; Empirical Evidence for OECD, Developing, and Emerging Market Economies," IMF Working Papers 06/228, International Monetary Fund.
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  7. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
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  9. Cukierman, A. & Miller, G.P. & Neyapti, B., 2000. "Central Bank Reform, Liberalization and Inflation in Transition Economies : An International Perspective," Discussion Paper 2000-106, Tilburg University, Center for Economic Research.
  10. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
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  12. James Forder, 2005. "The limits of `independence' and the policy of the ECB^," Public Choice, Springer, vol. 125(3), pages 431-444, December.
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  14. Forder, James, 1996. "On the Assessment and Implementation of 'Institutional' Remedies," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 39-51, January.
  15. Andreas Freytag, 2005. "The credibility of monetary reform – New evidence," Public Choice, Springer, vol. 124(3), pages 391-409, September.
  16. Bernard Laurens & Marco Arnone & Jean-François Segalotto, 2006. "The Measurement of Central Bank Autonomy; Survey of Models, Indicators, and Empirical Evidence," IMF Working Papers 06/227, International Monetary Fund.
  17. Keefer, Philip & Stasavage, David, 2001. "Checks and balances, private information, and the credibility of monetary commitments," Policy Research Working Paper Series 2542, The World Bank.
  18. Jakob de Haan & Sylvester C. W. Eijffinger & Sandra Waller, 2005. "The European Central Bank: Credibility, Transparency, and Centralization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042266, June.
  19. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  20. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
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  22. Andreas Freytag, 2002. "Success and Failure in Monetary Reform," Books, Edward Elgar, number 2531, March.
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