Reconsidering the principal components of central bank independence: The more the merrier?

Abstract

We use principal component analysis to reassess the link between different attributes of central bank independence and inflation performance. We suggest that coding problems may account for the fact that almost none of the attributes included in the Cukierman index has a systematic, plausible relationship with inflation. The multi-faceted Cukierman index also seems to be out-performed by a much narrower index focusing solely on policy independence. These findings point to the importance of using public choice analysis to isolate the real problem here: namely, finding specific central bank structures that effectively insulate central bankers from political pressures.

This is a preview of subscription content, log in to check access.

References

  1. Alesina, A. and Summers, L.H. (1993). Central bank independence and macroeconomic performance: Some comparative evidence. Journal of Money, Credit, and Banking 25: 151–162.

    Google Scholar 

  2. Al-Marhubi, F. and Willett, T.D. (1995). The anti inflationary influence of corporatist structures and central bank independence: The importance of the hump shaped hypothesis. Public Choice 84: 153–162.

    Google Scholar 

  3. Banaian, K., Burdekin, R.C.K. and Willett, T.D. (1995). On the political economy of central bank independence. In K.D. Hoover and S.M. Sheffrin (Eds.), Monetarism and the methodology of economics: Essays in honour of Thomas Mayer, 178–197. Brookfield, VT: Edward Elgar.

    Google Scholar 

  4. Banaian, K., Laney, L.O. and Willett, T.D. (1983). Central bank independence: An international comparison. Economic Review, Federal Reserve Bank of Dallas, Vol. 2 (March): 1–13.

  5. Burdekin, R.C.K. and Willett, T.D. (1991). Central bank reform: The Federal Reserve in international perspective. Public Budgeting and Financial Management 3: 619–649.

    Google Scholar 

  6. Cukierman, A. (1992). Central bank strategy, credibility, and independence: Theory and evidence. Cambridge, MA: MIT Press.

    Google Scholar 

  7. Cukierman, A., Webb, S.B. and Neyapti, B. (1992). Measuring the independence of central banks and its effect on policy outcomes. World Bank Economic Review 16: 353–398.

    Google Scholar 

  8. Grilli, V., Masciandaro, D. and Tabellini, G. (1991). Political and monetary institutions and public financial policies in the industrial countries. Economic Policy 13: 341–392.

    Google Scholar 

  9. Havrilesky, T. and Granato, J. (1993). Determinants of inflationary performance: Corporatist structures vs. central bank autonomy. Public Choice 76: 249–261.

    Google Scholar 

  10. Joliffe, I.T. (1986). Principal component analysis. New York: Springer-Verlag.

    Google Scholar 

  11. Lewarne, S. (1995). The Russian central bank and the conduct of monetary policy. In T.D. Willett, R.C.K. Burdekin, R.J. Sweeney and C. Wihlborg (Eds.), Establishing monetary stability in emerging market economies, 167–192. Boulder, CO: Westview Press.

    Google Scholar 

  12. Mayer, T. (Ed.). (1990). The political economy of American monetary policy. New York: Cambridge University Press.

    Google Scholar 

  13. Parkin, M. and Bade, R. (1978). Central bank laws and monetary policy: A preliminary investigation. In M.G. Porter (Ed.), The Australian monetary system in the 1970s, 24–39. Clayton, Australia: Monash University.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Banaian, K., Burdekin, R.C. & Willett, T.D. Reconsidering the principal components of central bank independence: The more the merrier?. Public Choice 97, 1–12 (1998). https://doi.org/10.1023/A:1004942714368

Download citation

Keywords

  • Principal Component Analysis
  • Public Finance
  • Central Bank
  • Public Choice
  • Real Problem