The impact of governance quality on central bank’s independence

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Local and global financial crises are caused by a wide range of geopolitical, macro-financial, and socio-economic determinants. The purpose of this study is to assess the role of central bank independence in preventing financial crises and mitigating their consequences. Two hypotheses were tested. A measure of the banking regulator independence is the CWN index of the central bank independence. The hypotheses were tested on data from 53 countries suffering from financial crises over the last 40 years (the sample includes both developed and developing countries from different continents). The tools of nonlinear logit regression (modeling the probability of loss of financial stability due to a financial crisis, considering different levels of the banking regulator independence) and panel regression with random effects (modeling the influence of the banking regulator independence on banking activities during crisis periods) were used for calculations. The study did not confirm that a high level of central bank independence is a necessary condition for preventing the occurrence of financial crises in the national economy. On the contrary, the likelihood of financial instability was found to be higher in countries with more independent central banks. Thus, during crisis periods, an increase in the CWN index by 1 ensures an increase in the regulatory capital adequacy parameter by an average of 0.28%, a decrease in return on assets by 0.59%, and an increase in the share of non-performing loans by 1.69%.

Section: Literature Reviewmentioning

confidence: 93%

Section: Literature Reviewmentioning

confidence: 99%

Banking system stability in crisis periods: The impact of the banking regulator independence

Kerimov,

Babayev,

Dudchenko

et al. 2023

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“…Political power attempts to achieve short-term economic growth through an expansionist monetary policy that created inflation to sway public opinion and win elections (Beju, 2008;Ouyang et al, 2022). Many empirical studies have found that average inflation is negatively related to CBI measures (Cukierman et al, 1992;Eijffinger & de Haan, 1996;Walsh, 2003;Vasylieva et al, 2022;Khokhych et al, 2023;Kerimov et al, 2023aKerimov et al, , 2023b; studies have shown that countries with higher levels of CBI tend to have lower inflation rates and are more successful in controlling inflation. The relationship between CBI and monetary stability has been a subject of extensive empirical analysis in the literature.…”

Section: Literature Reviewmentioning

confidence: 99%

The relationship between monetary stability and central bank independence: The case of Azerbaijan

Tanriverdi,

Jabiyev,

Bilan

et al. 2024

The independence of the central bank is one of the most important factors for effective monetary policy. Central bank independence is closely related to monetary stability, which is an important part of monetary policy. In this study, the purpose of the analysis is to understand whether monetary stability functions effectively for central bank independence in Azerbaijan using the vector autoregression method. In addition, the Granger Causality test was conducted to empirically investigate how central bank independence affects the provision of monetary stability in the economy of Azerbaijan over the data period from 1996 to 2022. In this framework, indices or variables are the exchange rate stability index (ERS) in 1996–2022, the level of monetary independence index (MI) in 1996–2020, taken from the “trilemma indexes”, which are defined as the consumer price index (CPI) in 1996–2022, and the broad money supply (M2) in 1996–2022. The findings of the study show that the independence of the central bank has a positive effect on the monetary stability of the Azerbaijani economy.

“…Even though international integration contributes to the unification of regulatory mechanisms of different countries (Babenko et al, 2017), the specifics of their application are determined by the conditions of national development. In particular, inflationary trends depend on the specifics of a country's economic development in each specific period (Aliyeva, 2022;Vasilyeva et al, 2013). In particular, in periods of war, the monetary policy of central banks has significant differences from the traditional approach to regulation (Danylyshyn & Bohdan, 2022), and in periods of financial crises, it is significantly softened (Oliveira & Santos, 2022).…”

Section: Literature Reviewmentioning

confidence: 99%

Central bank independence as a prerequisite for ensuring price stability: Modeling the role of the national pattern

Kerimov,

Babayev,

Dudchenko

et al. 2023

Self Cite

Ensuring price stability is a dominant function of the central bank. Empirical studies on various statistical samples give conflicting results regarding the influence of central bank independence on the inflation rate. The study offers a methodology for assessing the role of the formation of a national pattern of central bank independence in ensuring price stability. Calculations were made for 53 countries of the world using a combination of cluster analysis tools and panel regression modeling. The cluster analysis carried out at different time intervals of the study allowed defining three patterns of the formation of central bank independence. The changes in the clusters characterizing the peculiarities of the national patterns of central bank independence shows that for a number of countries there is no stable national pattern. Modeling based on panel data showed that when forming a country pattern “Limited level of central bank independence”, an increase in the level of independence of the central bank by one unit on average leads to an increase in the inflation rate by 7.09%. On the other hand, in the countries with the national patterns of central bank independence “Dominance of the institutional and financial component of ensuring the independence of the central bank” and “Dominance of the personal and functional component of ensuring the independence of the central bank”, the expected consequence of increasing the level of independence of the central bank by one unit is to reduce the inflation rate by an average of 3.32% and 6.03%, respectively.