Dynamic Central Bank Independence Indices and Inflation Rate: A New Empirical Exploration

37 Pages Posted: 23 Jul 2012 Last revised: 4 Apr 2017

See all articles by Marco Arnone

Marco Arnone

Centre for Macroeconomics & Finance Research (CeMaFiR); Catholic University of the Sacred Heart of Milan - Institute for Economic Policy

Davide Romelli

Trinity College (Dublin) - Department of Economics

Date Written: July 1, 2012

Abstract

It has been argued that economies with more independent central banks experience lower inflation over time. In this paper we show that this relationship is sensitive to the methodology through which central bank independence indices are constructed. We stress the importance of employing dynamic central bank independence indices in two ways. First, we perform unit root tests with structural breaks to verify if the implementation of central bank reforms represents a structural break for the inflation rate dynamics. Second, we implement a panel data analysis. We find evidence that legislative reforms that modify the degree of independence of a central bank have a strong impact on the inflation rate dynamics. Moreover, underlying the importance of employing dynamic central bank independence indices, we confirm the negative relationship between the latter and inflation for a sample of 10 OECD countries.

Keywords: central bank independence, political independence, economic independence

JEL Classification: E52, E58

Suggested Citation

Arnone, Marco and Romelli, Davide, Dynamic Central Bank Independence Indices and Inflation Rate: A New Empirical Exploration (July 1, 2012). Journal of Financial Stability, Vol. 9, No. 3, 2013; Paolo Baffi Centre Research Paper No. 2012-118. Available at SSRN: https://ssrn.com/abstract=2115452 or http://dx.doi.org/10.2139/ssrn.2115452

Marco Arnone

Centre for Macroeconomics & Finance Research (CeMaFiR) ( email )

Piazza Mirabello, 2
Milano, 20121
Italy

HOME PAGE: http://www.a-bpfoundation.org

Catholic University of the Sacred Heart of Milan - Institute for Economic Policy ( email )

Via Necchi, 5
20123 Milan
Italy
+39 02 72342921 (Phone)

Davide Romelli (Contact Author)

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

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