Central Bank Independence, Exchange Rate Regime, Monetary Policy and Inflation in Africa

Abel M. Agoba (), Vera Fiador (), Emmanuel Sarpong-Kumankoma and Jarjisu Sa-Aadu ()
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Abel M. Agoba: Coventry University
Vera Fiador: University of Ghana Business School
Jarjisu Sa-Aadu: Tippie College of Business, University of Iowa

Chapter Chapter 6 in The Economics of Banking and Finance in Africa, 2022, pp 183-225 from Palgrave Macmillan

Abstract: Abstract Theory associates the concepts of central bank independence (CBI), exchange rate regimes and monetary policy with price stability. Independent central banks and fixed exchange rates are institutional mechanisms that help keep inflation low by lending monetary policy credibility to governments. However, the two institutions are commonly analysed as substitutesSubstitutes that tie the hands of inflation-prone governments. Monetary policy effectiveness has also been a challenge in many developing countries; with suggestions that the institutional arrangement of central banks would have an impact on the outcome of monetary policy decisions. This study seeks to examine the interrelationships among these three concepts in Africa, where significant central bank independence reforms have taken place in both fixed and floating exchange rate regimes and with varied levels of monetary policy effectiveness. It uses data spanning 1970–2014, and a Two Step GMM, Two Stage Least Squares and Fixed Effects estimation methods. Results show that fixed exchange rate regimes have lower inflation rates than floating exchange rate regimes. However, CBI’s impact on inflation is higher in floating when compared to fixed exchange rate regimes. Also, monetary policy effectiveness is higher in Non-CFA Zone countries relative to CFA Zone countries. Its impact is enhanced by higher levels of CBI.

Keywords: Central bank independence; Exchange rate regimes; Monetary policy; Inflation (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-3-031-04162-4_6

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DOI: 10.1007/978-3-031-04162-4_6

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