Does Central Bank Independence Cause Low Inflation? A Sceptical View

55 Pages Posted: 21 Mar 2008 Last revised: 25 Mar 2008

See all articles by Carsten Hefeker

Carsten Hefeker

HWWA Institute of International Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Bernd Hayo

University of Marburg - School of Business & Economics

Date Written: March 2008

Abstract

In this survey, we present a number of arguments that question some aspects of the conventional view of central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, while the relevant economic theories focus on the aspect of goal independence, in practice most central banks tend to be only instrument independent. Third, CBI should not be treated as an exogenous variable, but attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems. Fourth, in a number of empirical studies, researchers found CBI to be correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there remains little reason to believe the correlation between CBI and low inflation tells us anything about causality.

Keywords: Central bank independence, monetary policy

JEL Classification: E58, E52

Suggested Citation

Hefeker, Carsten and Hayo, Bernd, Does Central Bank Independence Cause Low Inflation? A Sceptical View (March 2008). Paolo Baffi Centre Research Paper No. 2008-04. Available at SSRN: https://ssrn.com/abstract=1112026 or http://dx.doi.org/10.2139/ssrn.1112026

Carsten Hefeker (Contact Author)

HWWA Institute of International Economics ( email )

Heimhuder Strasse 71
20347 Hamburg, DE Hamburg 20148
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Bernd Hayo

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

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