Central Bank Independence, Inflation and Growth in Transition Economics

JOURNAL OF MONEY, CREDIT, AND BANKING, Vol 28 No 3, August 1997

Posted: 7 Apr 1997

See all articles by Prakash Loungani

Prakash Loungani

International Monetary Fund (IMF)

Nathan Sheets

Board of Governors of the Federal Reserve System

Abstract

This paper documents two empirical relationships that have emerged as the former communist countries have taken steps to transform their economies. First, data from a sample of twelve transition economies suggest that increased central bank independence (CBI) is correlated with lower inflation rates. This CBI-inflation correlation is not well explained by initial economic conditions and persists after controlling for fiscal performance and the overall quality of economic reforms. Second, across a larger set of twenty-five transition economies, there is a strong and robust negative relationship between inflation and subsequent real GDP growth. Inflation's adverse effect on investment appears to be one significant channel through which the relationship between inflation and growth arises.

JEL Classification: E31, E52, E58, P21

Suggested Citation

Loungani, Prakash and Sheets, Nathan, Central Bank Independence, Inflation and Growth in Transition Economics. JOURNAL OF MONEY, CREDIT, AND BANKING, Vol 28 No 3, August 1997, Available at SSRN: https://ssrn.com/abstract=3859

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

Nathan Sheets (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3819 (Phone)
202-736-5638 (Fax)

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