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Conclusion

  • Ranajoy Ray Chaudhuri
Chapter

Abstract

There is a considerable body of research that examines the relationship between central bank independence and economic performance. Most of the papers have focused on the relationship between independence levels and the inflation rate in the country. Among the earliest is a study that looks at the relationship between central banking laws and monetary policy in select industrialized economies and finds that central banks that are more independent in terms of policy-making as well as in the appointment of directors are able to achieve lower inflation. However, there appears to be no effect on the variability of inflation. Most subsequent studies reinforce the finding that countries with more independent central banks are likely to have lower inflation rates, though with various caveats. In terms of the relationship between central bank independence and real macroeconomic variables, the linkage can work through several channels. First, an independent central bank leads to fewer business cycle oscillations; this implies a more stable economy and decreases the risk premium portion of the real interest rate. A more autonomous central bank can also reduce partisan shocks to the economy after elections. The potential downside of an independent central bank with regard to real macroeconomic variables is that it may choose to focus on inflation even at a cost to the real sectors of the economy. Several studies do find linkages between central bank autonomy and the real sector, though the effect seems to be weaker than that on inflation.

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© The Author(s) 2018

Authors and Affiliations

  • Ranajoy Ray Chaudhuri
    • 1
  1. 1.Muhlenberg CollegeAllentownUSA

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