Inflation, Central Bank Independence and the Legal System

Abstract:     
We argue that a higher degree of de facto independence of the legal system from the other government branches as well as public trust in the legal system may reduce the average inflation record of countries through a direct and an indirect channel. The direct channel works by affecting potential output, while the indirect channel helps to increase the de facto independence of the central bank. In the empirical section of the paper, we present evidence in favor of both channels in a sample containing both industrial and Third World countries. A model that contains legal trust in addition to de jure central bank independence, checks and balances within government, and openness can explain 60% of the variation in the logarithm of the inflation rate.

Number of Pages in PDF File: 37

Keywords: Judicial Independence, Legal Trust, Central Bank Independence, Inflation

JEL Classification: D72, D78, H11, K42

working papers series