Social Trust and Central-Bank Independence

24 Pages Posted: 24 May 2012

See all articles by Niclas Berggren

Niclas Berggren

Research Institute of Industrial Economics (IFN); University of Economics, Prague - Faculty of Economics and Public Administration

Sven-Olov Daunfeldt

University of Umea - Department of Economics

Jörgen Hellström

Umeå University - Umeå School of Business and Economics

Date Written: May 23, 2012

Abstract

Central banks have been made more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm that there is such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust levels, the need for central-bank independence is strong enough to dominate the low ability; at high trust levels the ability for reform is high and dominates the low need; at intermediate trust levels there is neither need nor ability strong enough to generate very independent central banks.

Keywords: Trust, Credibility, Reforms, Monetary Policy, Inflation, Central Bank, Time Inconsistency

JEL Classification: E52, E58, P48, Z13

Suggested Citation

Berggren, Niclas and Daunfeldt, Sven-Olov and Hellström, Jörgen, Social Trust and Central-Bank Independence (May 23, 2012). IFN Working Paper No. 920. Available at SSRN: https://ssrn.com/abstract=2065320 or http://dx.doi.org/10.2139/ssrn.2065320

Niclas Berggren (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

HOME PAGE: http://www.ifn.se/nb

University of Economics, Prague - Faculty of Economics and Public Administration ( email )

nám. W. Churchilla 4
Praha, 130 67
Czech Republic

Sven-Olov Daunfeldt

University of Umea - Department of Economics ( email )

Umeå University
Umea, SE - 90187
Sweden
+46-90-786 99 92 (Phone)
+46-90-772 302 (Fax)

Jörgen Hellström

Umeå University - Umeå School of Business and Economics ( email )

Umea, 90187
Sweden
+46-90-7866987 (Phone)

HOME PAGE: http://www.usbe.umu.se/english/about/staff/?languageId=1&uid=johe0001

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