The Role of Central Banks in Maintaining Monetary Stability During the Global Financial Crisis
Banks and Bank Systems, Volume 7, Issue 3, pp. 51-69, 2012
19 Pages Posted: 11 Mar 2013
Date Written: September 1, 2012
The issue of central bank independence (CBI) and its relation to growth and inflation has been a subject of lively debate over the past two decades. Prior empirical work has suggested a relationship between CBI and inflation, with only a tenuous link to growth. In the wake of the global financial crisis, did CBI continue to influence inflation? Did CBI have any effect on either interest rate policies or the growth of credit seen before the crisis? Examining 91 countries from 2003-2010, the author finds that more independent central banks were correlated with lower interest rates from 2003 onward, but showed lower inflation and more restrained bank credit. The results suggest that, in line with earlier theory, independent central banks are a more desirable form of institutional arrangement, but other, better arrangements may exist.
Keywords: central bank independence, global financial crisis, inflation, bank credit, new institutional economics
JEL Classification: E58, H11, O23
Suggested Citation: Suggested Citation