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

Abstract

This paper explores the level of independence of the National bank of the Republic of Macedonia by primarily focusing on the legal provisions that pertain to the key aspects for achieving and maintaining price stability. It provides a historical perspective of the evolution of the independence since the first years of transition. The assessment of the independence of the NBRM is based on the index of Cukierman, Webb, and Neyapti (1992), as one of the most commonly used indices, and the index of Jacome and Vazquez (2005), which incorporates some specific aspects relevant for transition economies. Both indices indicate that the legal independence of the NBRM has increased over the years and that the current legal framework provides a high level of independence. Yet, it should be emphasized that there is a room for further strengthening, in particular in the areas of policy formulation and the process of appointment of the non-executive members of the council of the NBRM. As the indices are based on the legal provisions, they can serve only as an indication of the actual independence of the central bank. JEL Classification Numbers: E42, E58

A New Insight into the Measurement of Central Bank Independence

“…The index was applied to 18 OECD countries (Capie, Fischer, Goodhart & Schnadt, 1994). The index covered elements of both political and economic independence (Lybek, 1999b;Obben, 2006;Bezhoska, 2017). Political Independence was assessed through eight variables related to the central bank's governor and the board, conflict resolution between the government and the central bank, objective and formulation of monetary policy.…”

“…The new measure was called "Modified Cukierman Index (MCI)" as it was based on the structure of the CWN (1992) index. Additionally, the MCI incorporated new dimensions for CBI to capture key features of central bank reform in Latin America, as well as dimensions related to central bank accountability and transparency (Bezhoska, 2017).…”

“…If the political authorities have the ability to appoint the governor, they will select those who will not challenge their policies. In the same way, frequent turnover may reflect the dismissal of governors that refuse to comply with the political authorities' instructions (Lybek, 1999b;Bezhoska, 2017). It is notable that the authors admitted that a low turnover rate does not necessarily imply a high level of independence as a relatively subservient governor may stay in office for a long time.…”

“…Theoretically, CBI is considered the primary solution for the inflationary bias of governments. Empirically, it has been argued that countries with higher CBI were able to achieve lower inflation levels and improved economic performance compared to those with lower degree of CBI (De Sousa, 2001; Kamaly & Farrag, 2005;Bezhoska, 2017;Cargill, 2013). Accordingly, a growing part of literature tackled the issue of CBI, its measures and correlation with macroeconomic variables (like, Cukierman (1992) and Jácome (2001)).…”

“…However, CBI is a complex measure that is based on various formal and informal arrangements (Cukierman, 1992;Bezhoska, 2017). Yet, most of the empirical work that endeavored to quantify the degree of CBI focused on the formal and legal aspects of independence, without considering that the distance between theory and practice is not always short (like, Lybek (1999) and Jácome (2001)).…”