Central Bank Independence and Inflation in India: The Role of Financial Development

Aijaz Ahmad Bhat, Javaid Khan, Sajad Ahmad Bhat and Javed Ahmad Bhat

Studies in Economics and Econometrics, 2023, vol. 47, issue 4, 392-407

Abstract: Using a legal or de jure measure of central bank independence, the present study attempts to examine the impact of central bank independence (CBI) on the inflation in case of Indian economy over the period, 1991–1992 to 2018–2019. To ascertain the possible dependence of association on the institutional quality proxied by level of financial development, we incorporated a non-linear logistic smooth transition framework with ratio of private credit to GDP as an appropriate transition variable. We found a statistically significant regime dependency with respect to the impact of CBI on inflation. In both the short-run and long run, increase in value of CBI is found to increase inflation when the level of financial development is below threshold value, however, beyond this threshold, any increase in CBI would decrease it. The impact of other control variables like GDP growth, oil price inflation & lagged inflation is found to be positive and statistically significant. However, currency appreciation is found to lower inflation. Our findings signify an appreciable role for the degree of financial development in the transmission of central bank’s monetary policy stances to maintain low inflation.

Date: 2023
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DOI: 10.1080/03796205.2023.2264518

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