Independence Day for the 'Old Lady': A Natural Experiment on the Implications of Central Bank Independence

17 Pages Posted: 2 May 2007

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Peter Macmillan

University of St. Andrews - School of Management

Charles Nolan

University of St. Andrews

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Abstract

Central bank independence is widely thought be a sine qua non of a credible commitment to price stability. The surprise decision by the UK government to grant operational independence to the Bank of England in 1997 affords us a natural experiment with which to gauge the impact on the yield curve from the adoption of central bank independence. We document the extent to which the decision to grant independence was "news" and illustrate that the reduction in medium- and long-term nominal interest rates was some 50 basis points, which we show to be consistent with a sharp increase in policy-maker's aversion to inflation deviations from target. We therefore suggest that central bank independence represents one of the clearest signals available to elected politicians about their preferences on the control of inflation.

Suggested Citation

Chadha, Jagjit S. and Macmillan, Peter and Nolan, Charles, Independence Day for the 'Old Lady': A Natural Experiment on the Implications of Central Bank Independence. Manchester School, Vol. 75, No. 3, pp. 311-327, June 2007. Available at SSRN: https://ssrn.com/abstract=981591 or http://dx.doi.org/10.1111/j.1467-9957.2007.01019.x

Jagjit S. Chadha (Contact Author)

University of St. Andrews - School of Management ( email )

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Peter Macmillan

University of St. Andrews - School of Management ( email )

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St. Andrews, Fife KY16 9SS
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Charles Nolan

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

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