A New Insight into the Measurement of Central Bank Independence

Abstract

The present paper attempts to expand the existing literature on Central Bank Independence (CBI) by proposing new measures for CBI. It designs two indices: one tackling the de jure CBI and the other assessing the de facto level of CBI. The two measures outweigh traditional measures in various aspects; first, the two indices are more comprehensive in terms of possible institutional arrangements. The de jure index incorporates several aspects related to CBI that were not previously grouped together in a unified index i.e. financial independence, limitations related to indirect credit to government, accountability and transparency. The de facto index comprises the main existing indicators for measuring actual CBI (i.e. turnover ratio, political vulnerability indicator and monetary policy reaction function) in addition to new variables, as the lender of last resort function, independence of central bank board, and financial independence that were not included in almost all previous studies. Second, the two indices allow a higher level of precision as they comprise aspects that can be objectively codified with a minimum level of subjectivity. Third, the two indices cover the same attributes of CBI to facilitate measuring the deviation between de jure and de facto level of independence for any central bank. The current paper provides a comprehensive definition and analysis of both indices to enable their replication in future studies.

Central Bank Independence: A Pseudo de Facto Case of Reserve Bank of India

“…The prerequisite for verifying the inverse relation between CBI and inflation impelled researchers to enumerate the CBI through construction of indices (Banaian, 2008; Parkin, 2013). The diverse literature on measuring CBI played a pivotal role in enhancing CBI across the globe and to capture the quantitative relation between CBI and macroeconomic performance (Jasmine et al, 2019).…”

“…However, the indices did not take into consideration the important institutional arrangements like financial independence, supervisory role of banks, independence of central bank’s board (Crowe & Meade, 2008). Moreover, many components like accountability, transparency regarding forecasts & publications and to act as last resort for funding were also missing in their measurements of CBI (Jasmine et al, 2019).…”

“…Cukierman (1992) and Cukierman et al (1992) were the first to differentiate between de jure and de facto measures of CBI and developed the parameters for assessing the actual degree of independence (Parkin, 2013). Turnover rate of central bank governors was the first and main indicator incorporated and it was calculated by taking the actual average term of office of the central bank governor (Jasmine et al, 2019). The indicator is relied on the premise more the quick turnover rate of governors would connote lower degree of independence and vice versa (de Haan & Klomp, 2010).…”

Interaction of Central Bank Independence and Transparency: Bibliometric Analysis

“…Thus, some authors consider transparency as a component of central bank independence. Therefore, Fouad et al (2019) proposed the composition of the elements of the de jure and de facto indices of independence of the central bank, which includes indicators of transparency and accountability. On the other hand, transparency is a condition for increasing the independence of the central bank and relates to an increase in its accountability level, which allows to increase the effectiveness of monetary policy (Dincer and Eichengreen, 2014).…”

Monetary Base Controllability after an Exit from Quantitative Easing

“…. If the bank sets h = h*, then a starts moving toward negative, and the condition (11) does not hold. In order to avoid a decrease in a, the bank must increase h to reach the a' = 0 locus, but it is not optimal either.…”