Central bank reform, liberalization and inflation in transition economies—an international perspective

Abstract

This paper develops extensive new indices of legal independence (central bank independence (CBI)) for new central banks (CBs) in 26 former socialist economies. The indices reveal that CB reform in the FSE during the 1990s has been quite ambitious. In spite of large price shocks, reformers in those countries chose to create CBs with levels of legal independence that are substantially higher, on average, than those of developed economies during the 1980s. The evidence in the paper shows that CBI is unrelated to inflation during the early stages of liberalization. But for sufficiently high and sustained levels of liberalization, and controlling for other variables, legal CBI and inflation are significantly and negatively related. These findings are consistent with the view that even high CBI cannot contain the initial powerful inflationary impact of price decontrols. But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in reducing inflation. The paper $

Legal central bank independence and inflation in various phases of transition

“…One of the most complete pieces of research about CBI and its influence to some macro-economic aggregates in transition countries was conducted by Cukierman, Miller, and Neyapti (2002). The authors used two measurements of CBI, and have found out that the most important influence on the level of CBI in transition countries has: allocation of the authorities in conducting monetary policy, procedure of resolving the conflict between the government and the central bank, and recognises the importance of the price stability in central bank legislation.…”

“…I note that indicator of the depreciation of the real value of money has also been introduced in Cukierman (1992), Cukierman et al (2002), among others. I observe inflation during the period 1994-2002, which is marked by a series of economic reforms, not taking into account the highest and lowest rates in order to preserve the stability of the series.…”

“…Furthermore, it is obvious that the value of the cumulative liberalisation index after 1994 in all of the observed countries was higher than two. Cumulative liberalization index (CLI) has been used in Cukierman et al (2002), and Loungani and Sheets (1997) etc. too.…”

Controlling inflation in transition economies: The relevance of central bank independence and the right nominal anchor

“…For example, Cukierman et al [1998] show that inflation and legal independence are negatively related but only above a sufficiently high threshold level of sustained liberalization. As long as legal central bank independence is not anchored on institutional adjustments necessary for successful transformation to a (social) market economy, then establishing solely legal central bank independence may be meaningless or ineffective.…”

Central Bank Autonomy without Monetary Policy

“…The relationship between central bank autonomy and the inflation rate has been extensively investigated by the empirical economic literature. The results of these studies have generally shown that those countries that accorded greater autonomy to their central banks also experienced lower average inflation, without harming average real growth (see, among others, Grilli et al 1991, Cukierman 1992 Alesina and Summers, 1993, IMF 1996, Cukierman et al 2001 However, both theoretical arguments and empirical findings have associated central bank autonomy with the conduct of monetary policy, without paying too much attention to those institutional cases where a central bank exists but is not responsible for the conduction of monetary policy. These cases are particularly relevant for those countries which do not have their own currency, typically some small countries; 3 these cases also apply to those countries which À despite having the opportunity to emit their own currency À have chosen to adopt another country's currency as the predominant or exclusive legal tender (official dollarization).…”