Central Bank Independence, Exchange Rate Policy and Inflation Persistence Empirical Evidence on Selected EMU Countries

Athanasios Papadopoulos and Moise Sidiropoulos

No 107, Working Papers from University of Crete, Department of Economics

Abstract: The purpose of this paper is to provide theoretical arguments and explore for empirical evidence for the rationale that low inflation persistence may be achieved either by setting up an independent Central Bank or by an exchange-rate based policy. Our theoretical analysis states that the degree of Central Bank independence and exchange rate policy changes affect the inflation persistence. In addition, our empirical analysis, which concerns with selected EMU countries (France, Germany, Greece, Italy and Spain for the period 1980-1998) validates the argument. In this exercise the most likely date for the change in regime is detected by a procedure based upon the recent work of Perron (1997), where the null hypothesis of a unit root is set against the alternative of stationarity about a single broken trend line.

Keywords: Exchange rate policy; Central Bank independence; inflation persistence; EMU (search for similar items in EconPapers)
JEL-codes: C22 E31 E42 E58 (search for similar items in EconPapers)
Pages: 16 pages
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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