Inflation, Central Bank Independence and the Legal System

ICER Working Paper No. 2 - 2005

37 Pages Posted: 20 May 2005

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Stefan Voigt

University of Hamburg - Institute of Law & Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 2005

Abstract

We argue that a higher degree of de facto independence of the legal system from the other government branches as well as public trust in the legal system may reduce the average inflation record of countries through a direct and an indirect channel. The direct channel works by affecting potential output, while the indirect channel helps to increase the de facto independence of the central bank. In the empirical section of the paper, we present evidence in favor of both channels in a sample containing both industrial and Third World countries. A model that contains legal trust in addition to de jure central bank independence, checks and balances within government, and openness can explain 60% of the variation in the logarithm of the inflation rate.

Keywords: Judicial Independence, Legal Trust, Central Bank Independence, Inflation

JEL Classification: D72, D78, H11, K42

Suggested Citation

Hayo, Bernd and Voigt, Stefan, Inflation, Central Bank Independence and the Legal System (February 2005). ICER Working Paper No. 2 - 2005. Available at SSRN: https://ssrn.com/abstract=724661 or http://dx.doi.org/10.2139/ssrn.724661

Bernd Hayo

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)

Stefan Voigt (Contact Author)

University of Hamburg - Institute of Law & Economics ( email )

Johnsallee 35
Hamburg, 20148
Germany
+49-40-428385782 (Phone)
+49-40-428386794 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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