The Impact of Central Bank Independence on the Performance of Inflation Targeting Regimes

Abstract:     
This paper examines the benefits of inflation targeting in both advanced and emerging economies. We do not detect significant effects in advanced economies and only find small benefits in emerging economies, in line with previous studies. However, when we differentiate the impact of inflation targeting based on the degree of central bank independence, we find large effects in emerging economies with low central bank independence. Our results therefore suggest that central bank independence is not a prerequisite for successful implementation of inflation targeting. Furthermore, we provide evidence that one channel through which inflation targeting lowers inflation more in countries with low central bank independence is the reduction of budget deficits following the adoption of an inflation target.

Number of Pages in PDF File: 39

Keywords: inflation targeting, central bank independence

JEL Classification: E52, E58

working papers series