Central Bank Independence, Inflation, and Growth in Transition Economies

Abstract

In 1his paper, we document two empirical relationships iliat have emerged as ilie former communist countries have taken steps to transform their economies from command systems to market-based systems. First, increased central bank independence has tended to improve inflation performan<;e. Second, high inflation has adversely affected real activity. More specifically, in the first sec;tion of iliis paper, we develop indices of central bank independence (CBI) for twelve transition economies and examine the relationship between CBI and inflation performance across iliese countries. Statistical evidence suggests iliat the transition economies with more independent central banks have achieved lower inflation than their counterparts. The second section of this paper studies ilie relationship between inflation and growth in twenty-six transition economies. We present econometric evidence indicating iliat reducing inflation helps stabilize economic activity, following ilie sharp output declines iliat occur during ilie initial stages of transition. The paper conc1udes iliat establishing an independent central bank is a concrete institutional reform iliat may re:duce inflation and thus facilitate economic grow1h.

Central Bank Independence - the Case of the National Bank of Republic of Macedonia

“…They find that legal independence becomes effective in controlling inflation, but only after the process of price liberalization takes momentum, as it can have a powerful inflationary impact. Negative correlation between the legal independence and inflation is also found by Loungani and Sheets (1997) Cukierman et al (1992). The same conclusion is valid for the actual independence that he measures through two approaches: turnover rate of governors and the survey of Cukierman (1992).…”

Central Bank Independence and Inflation in Transition Economies: A Comparative Meta-Analysis with Developed and Developing Economies

“…6 Following these pioneering works, studies on former socialist transition economies also started appearing in 1997. They include: Loungani and Sheets (1997), Maliszewski (2000), Cukierman et al (2002), Eijffinger and Stadhouders (2003), Hammermann and Flanagan (2007), Dumiter (2011), Maslowska (2011), Bogoev et al (2012a, Bogoev et al (2012b), and Petrevski et al (2012). Hereinafter, we will especially review studies after Dumiter (2011), which are not covered by Klomp and de Haan (2010).…”

“…Consequently, as Table 3 reports, for transition studies, we selected 10 papers from Loungani and Sheets (1997) to Petrevski et al (2012), referenced in the preceding section; for non-transition studies, we chose 12 works from Walsh (1997) to Alpanda and Honig (2014).…”

“…For this reason, many researchers not only tried to measure the degree of CBI in these countries but also carried out empirical studies that examined the relationship between CBI and inflation in response to the call from Kydland and Prescott (1977) and Barro and Gordon (1983). Since the pioneering research work of Loungani and Sheets (1997), many empirical results have been published, including the recent work of Petrevski et al (2012).…”

Annual Evaluation for the Independence of People's Bank of China: An Attempt of Fuzzy Quantization

“…Among them, the methods which apply to China include TOR method that evaluates CBI by calculating the average tenure of central bank president and the rate of change (Cukierman & Webb, 1992), and LS method that uses standard questionnaire to evaluate CBI from three respects: target independence, political independence and economic independence (Loungani & Sheets, 1997). However, because the president and management system of PBC has not changed after Xiaochuan Zhou took up the position in 2002 and the government succession had been finished in 2003, the subdivided indexes has not changed.…”