Monetary Policy Shifts and Central Bank Independence

Irfan Qureshi

No 269096, Economic Research Papers from University of Warwick - Department of Economics

Abstract: Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 60
Date: 2017-09-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Monetary Policy Shifts and Central Bank Independence (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269096

DOI: 10.22004/ag.econ.269096

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