Central bank independence and inflation preferences: new empirical evidence on the effects on inflation

Louka T. Katseli, Anastasia Theofilakou and Kalliopi-Maria Zekente
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Louka T. Katseli: University of Athens
Kalliopi-Maria Zekente: Alpha Bank and University of Athens

No 265, Working Papers from Bank of Greece

Abstract: On theoretical grounds, a clear distinction exists between central bank independence and inflation aversion. In the conduct of monetary policy, both contribute to lower inflation. In this paper, we empirically re-examine the nexus between central bank independence and inflation for a large sample of advanced and developing countries over the period 1992-2014 by explicitly accounting for the effect of central bank inflation preferences on inflation developments. Our evidence suggests that both features matter for mitigating inflationary pressures, in line with the relevant theoretical studies. Central bank independence alone seems not to be a sufficient condition to curtail inflation; the expected inverse relationship between central bank independence and inflation appears to hold when we account for the (inflation) conservatism of the central bank. At the same time, higher central bank conservatism seems to result in lower inflationary pressures in the economy. Our results do not support the hypothesis of an interaction (either as substitutes of complements) between the degree of independence and conservatism of the central bank.

Keywords: Central bank independence; inflation conservatism; System GMM (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 32
Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Central Bank Independence and Inflation Preferences: New Empirical Evidence on the Effects of Inflation (2020)
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