The Role of Political Institutions for the Effectiveness of Central Bank Independence

Kai Hielscher and Gunther Markwardt

No 3396, CESifo Working Paper Series from CESifo

Abstract: This paper empirically studies the impact of the quality of political institutions on the link between central bank independence and inflation. Making use of data on the evolution of central bank independence over time and controlling for possible nonlinearities, we employ interaction models to identify the conditions under which more central bank independence will enhance a country’s inflation performance. Examining a cross-section of up to 69 countries, we are able to show that granting a central bank more autonomy does not necessarily lead to better inflation performance. To lower inflation by increasing independence, two conditions must be fulfilled: (1) The change in independence must be sufficiently large, and (2) the quality of the political institutions must be sufficiently high.

Keywords: central bank independence; inflation; institutional quality; monetary policy (search for similar items in EconPapers)
JEL-codes: E02 E31 E58 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: The role of political institutions for the effectiveness of central bank independence (2012)
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