Central Bank Independence and Disinflationary Credibility: A Missing Link?
45 Pages Posted: 22 Jun 2007
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Central Bank Independence and Disinflationary Credibility: A Missing Link?
Central Bank Independence and Disinflationary Credibility: A Missing Link?
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: Suggested Citation
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