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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Notes
- 1.
Bade , R., & Parkin, M. (1988) Central bank laws and monetary policy. Unpublished manuscript. London, Ontario: Department of Economics, University of Western Ontario.
- 2.
Alesina , A. (1988). Macroeconomics and Politics (S. Fischer, Ed.). NBER Macroeconomics Annual, 3, 13–62.
- 3.
Alesina , A. (1989). Politics and Business Cycles in Industrial Democracies. Economic Policy, 4(8), 57–98.
- 4.
Grilli , V., Masciandaro, D., & Tabellini, G (1991). Political and Monetary Institutions and Public Financial Policies in the Industrial Countries. Economic Policy, 6(13), 342–392.
- 5.
Alesina , A., & Grilli, V. (1991). The European central bank: Reshaping monetary politics in Europe (No. w3860). National Bureau of Economic Research.
- 6.
Cukierman, A., Miller, G. P., & Neyapti, B. (2002). Central Bank Reform, Liberalization and Inflation in Transition Economies—An International Perspective. Journal of Monetary Economics, 49(2), 237–264.
- 7.
Jácome, L. I., & Vázquez, F. (2008). Is There Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean. European Journal of Political Economy, 24(4), 788–801.
- 8.
Dincer, N. N., & Eichengreen, B. (2014). Central Bank Transparency and Independence: Updates and New Measures. International Journal of Central Banking, 10(1), 189–259.
- 9.
Nordhaus, W. (1975). The Political Business Cycle. The Review of Economic Studies, 42(2), 169–190.
- 10.
MacRae, C. D. A. (1977). Political Model of the Business Cycle. Journal of Political Economy, 85(2), 239–263.
- 11.
Rogoff, K., & Sibert, A. (1988). Elections and Macroeconomic Policy Cycles. The Review of Economic Studies, 55(1), 1–16.
- 12.
Hibbs , D. (1987). The American Political Economy: Macroeconomics and Electoral Politics. Cambridge; London: Harvard University Press.
- 13.
Alesina , A. (1988). Macroeconomics and Politics (S. Fischer, Ed.). NBER Macroeconomics Annual, 3, 13–62.
- 14.
Alesina, A. (1989). Politics and Business Cycles in Industrial Democracies. Economic Policy, 4(8), 57–98.
- 15.
Willett, T., & Banaian, K. (1988). Legislation and Political Business Cycles: Comment. Kyklos, 41(3), 507–511.
- 16.
Rogoff , K. (1985). The Optimal Degree of Commitment to an Intermediate Monetary Target. The Quarterly Journal of Economics, 100(4), 1169–1189.
- 17.
Tabellini , G. (1987). Central Bank Reputation and the Monetization of Deficits: The 1981 Italian Monetary Reform. Economic Inquiry, 25(2), 185–200.
- 18.
Alesina, A., & Summers, L. H. (1993). Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence. Journal of Money, Credit and Banking, 25(2), 151–162.
- 19.
De Long, J. B., & Summers, L. H. (1992). Macroeconomic Policy and Long-Run Growth. Economic Review – Federal Reserve Bank of Kansas City, 77(4), 5–25.
- 20.
Cukierman, A., Kalaitzidakis, P., Summers, L. H., & Webb, S. B. (1993). Central Bank Independence, Growth, Investment, and Real Rates. Carnegie-Rochester Conference Series on Public Policy, 39, 95–140.
- 21.
Pastor Jr., M. & Maxfield, S. (1999). Central Bank Independence and Private Investment in the Developing World. Economics and Politics, 11(3), 299–309.
Bibliography
Alesina, A. (1988). Macroeconomics and Politics (S. Fischer, Ed.). NBER Macroeconomics Annual, 3, 13–62.
Alesina, A. (1989). Politics and Business Cycles in Industrial Democracies. Economic Policy, 4(8), 57–98.
Alesina, A. & Grilli, V. (1992). The European Central Bank: Reshaping Monetary Politics in Europe. In Canzoneri, M., Grilli, V. & Masson, P. (Eds.), Establishing a Central Bank: Issues in Europe and Lessons from the U.S. (43–77). Cambridge; England: Cambridge University Press.
Alesina, A., & Summers, L. H. (1993). Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence. Journal of Money, Credit and Banking, 25(2), 151–162.
Bade, R., & Parkin, M. (1988). Central Bank Laws and Monetary Policy. Unpublished Manuscript, University of Western Ontario.
Cukierman, A., Miller, G. P., & Neyapti, B. (2002). Central Bank Reform, Liberalization and Inflation in Transition Economies—An International Perspective. Journal of Monetary Economics, 49(2), 237–264.
Cukierman, A., Kalaitzidakis, P., Summers, L. H., & Webb, S. B. (1993). Central Bank Independence, Growth, Investment, and Real Rates. Carnegie-Rochester Conference Series on Public Policy, 39, 95–140.
De Long, J. B., & Summers, L. H. (1992). Macroeconomic Policy and Long-Run Growth. Economic Review – Federal Reserve Bank of Kansas City, 77(4), 5–25.
Dincer, N. N., & Eichengreen, B. (2014). Central Bank Transparency and Independence: Updates and New Measures. International Journal of Central Banking, 10(1), 189–259.
Grilli, V., Masciandaro, D., & Tabellini, G. (1991). Political and Monetary Institutions and Public Financial Policies in the Industrial Countries. Economic Policy, 6(13), 342–392.
Hibbs, D. (1987). The American Political Economy: Macroeconomics and Electoral Politics. Cambridge; London: Harvard University Press.
Jácome, L. I., & Vázquez, F. (2008). Is There Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean. European Journal of Political Economy, 24(4), 788–801.
MacRae, C. D. A. (1977). Political Model of the Business Cycle. Journal of Political Economy, 85(2), 239–263.
Nordhaus, W. (1975). The Political Business Cycle. The Review of Economic Studies, 42(2), 169–190.
Pastor Jr., M., & Maxfield, S. (1999). Central Bank Independence and Private Investment in the Developing World. Economics and Politics, 11(3), 299–309.
Rogoff, K. (1985). The Optimal Degree of Commitment to an Intermediate Monetary Target. The Quarterly Journal of Economics, 100(4), 1169–1189.
Rogoff, K., & Sibert, A. (1988). Elections and Macroeconomic Policy Cycles. The Review of Economic Studies, 55(1), 1–16.
Tabellini, G. (1987). Central Bank Reputation and the Monetization of Deficits: The 1981 Italian Monetary Reform. Economic Inquiry, 25(2), 185–200.
Willett, T., & Banaian, K. (1988). Legislation and Political Business Cycles: Comment. Kyklos, 41(3), 507–511.
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Ray Chaudhuri, R. (2018). Conclusion. In: Central Bank Independence, Regulations, and Monetary Policy. Palgrave Macmillan, New York. https://doi.org/10.1057/978-1-137-58912-5_13
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