Reconsidering Central Bank Independence

Posted: 29 Jan 2003

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Carsten Hefeker

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

Abstract

In this paper, we survey the case for central bank independence (CBI). We conclude that CBI is neither necessary nor sufficient for monetary stability. CBI is just one potentially useful monetary policy design instrument among several, and CBI should not be treated as an exogenous variable. Instead the question that should be addressed is why societies decide to make their central banks independent? The reasons why CBI is chosen are related to legal, political, and economic systems. A number of empirical studies find correlations between CBI and low inflation rates. Endogeneity of CBI suggests, however, that the correlation has no implications for causality.

Keywords: Central bank independence, monetary policy

JEL Classification: E58, E52

Suggested Citation

Hayo, Bernd and Hefeker, Carsten, Reconsidering Central Bank Independence. European Journal of Political Economy, Vol. 18, pp. 653-674, 2002. Available at SSRN: https://ssrn.com/abstract=363721

Bernd Hayo (Contact Author)

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)

Carsten Hefeker

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

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