Central Bank Independence, Economic Freedom, and Inflation Rates

King Banaian and William A Luksetich

Economic Inquiry, 2001, vol. 39, issue 1, 149-61

Abstract: Measures of central bank independence combine many attributes that may or may not affect inflation. Central bank attributes are chosen as a result of political calculations over the distribution of resources between competing interest groups. Simultaneity bias results from regressions of central bank independence or of economic and political freedom on inflation or growth. Our estimates demonstrate the connections between economic and political freedom and central bank attributes that lead to inflation. Countries showing high degrees of economic freedom adopt structures that lead to lower inflation; those that show high degrees of political freedom do not adopt inflation-reducing institutional structures. Copyright 2001 by Oxford University Press.

Date: 2001
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