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Inflation, Central Bank Independence and the Legal System

  • Bernd Hayo

    (Philipps University Marburg)

  • Stefan Voigt

    (University of Kasel and ICER)

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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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 57.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:57
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  7. Bernd Hayo & Stefan Voigt, 2003. "Explaining de facto judicial independence," ICER Working Papers 01-2004, ICER - International Centre for Economic Research.
  8. Sergio Clavijo, 2000. "Central Banking and Macroeconomic Coordination: The Case of Colombia," BORRADORES DE ECONOMIA 002113, BANCO DE LA REPÚBLICA.
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  17. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November.
  18. Andreas Freytag, 2001. "Does central bank independence reflect monetary commitment properly? Methodical considerations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 181-208.
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