Central Bank Independence and Inflation Volatility in Developing Countries

Garriga, Ana Carolina; Rodriguez, Cesar M.

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Central Bank Independence and Inflation Volatility in Developing Countries

Economic Analysis and Policy. https://doi.org/10.1016/j.eap.2023.05.008

22 Pages Posted: 19 May 2023 Last revised: 8 Jun 2023

See all articles by Ana Carolina Garriga

Ana Carolina Garriga

University of Essex - Department of Government

Cesar M. Rodriguez

Portland State University - Department of Economics

Date Written: May 14, 2023

Abstract

This paper analyzes the effects of legal central bank independence (CBI) on inflation volatility in developing countries. We discuss why CBI should curb inflation volatility, independently from its effect via lowering inflation levels. Empirical analyses in a sample of 96 developing countries between 1980 and 2014 show that CBI is directly and unconditionally associated with lower volatility. The magnitude of this effect is larger in more democratic countries even after accounting for the endogeneity of CBI and inflation. Our results are robust to alternative measurements of the main variables, different model specifications, and methodologies.

Keywords: Central bank independence, volatility, measurement, democracy, developing countries

JEL Classification: E31, E52, E58

Suggested Citation: Suggested Citation

Garriga, Ana Carolina and Rodriguez, Cesar M., Central Bank Independence and Inflation Volatility in Developing Countries (May 14, 2023). Economic Analysis and Policy. https://doi.org/10.1016/j.eap.2023.05.008, Available at SSRN: https://ssrn.com/abstract=4447839