Central Bank Independence and Disinflationary Credibility: A Missing Link?

45 Pages Posted: 22 Jun 2007

See all articles by Adam S. Posen

Adam S. Posen

Peterson Institute for International Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 1995

Abstract

Granting central banks independence from short-term political control is widely assumed to decrease inflation by increasing the credibility of commitments to price stability. This paper analyzes public- and private-sector behavior in a sample of seventeen OECD countries for evidence of variations in disinflationary credibility with monetary institutions. The paper does not find evidence that the costs of disinflation are lower in countries with independent central banks, even when differences in contracting behavior are taken into account. It also does not find evidence that central bank independence inhibits government collection of seignorage revenues or manipulation of economic policy for electoral gain. These results raise questions about some explanations of the negative correlation between central bank independence and inflation, as well as the empirical relevance of government time-inconsistency problems as a source of inflation differences.

Keywords: central bank, independence, inflation, credibility

JEL Classification: E52, E58

Suggested Citation

Posen, Adam S., Central Bank Independence and Disinflationary Credibility: A Missing Link? (May 1995). FRB of New York Staff Report No. 1, Available at SSRN: https://ssrn.com/abstract=993948 or http://dx.doi.org/10.2139/ssrn.993948

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