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Monetary Policy Shifts and Central Bank Independence

Irfan Qureshi

MPRA Paper from University Library of Munich, Germany

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: Time-varying policy parameters; macroeconomic volatility; central bank independence; type of chairman changes (search for similar items in EconPapers)
JEL-codes: E30 E42 E43 E52 E58 E61 O11 O23 O57 (search for similar items in EconPapers)
Date: 2015-01-02, Revised 2017-09
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Related works:
Working Paper: Monetary Policy Shifts and Central Bank Independence (2017) Downloads
Working Paper: Monetary Policy Shifts and Central Bank Independence (2017) Downloads
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