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Central bank independence and low inflation: who leads the dance?

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  • Itai Agur

Abstract

One strand of empirical literature finds that central bank independence (CBI) lowers inflation. Another strand of literature finds that low inflation is a key determinant of reform towards increased CBI. This paper investigates whether either variable can be identified as a first instigator. Using the largest CBI dataset to date, this paper applies rolling balanced-panel Granger causality tests between CBI reform and changes in inflation. For advanced economies, CBI reform is found to significantly lead disinflation, while there is no Granger causality in the opposite direction. Instead, among emerging and developing economies, CBI reforms tend to follow quickly upon disinflation episodes, while the lags from CBI reform to disinflation are long. An interpretation is that in emerging and developing economies CBI reform often followed on crises that involved high inflation, whereas in various advanced economies a shift in thinking about central banking first triggered CBI reform.

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  • Itai Agur, 2021. "Central bank independence and low inflation: who leads the dance?," Applied Economics Letters, Taylor & Francis Journals, vol. 28(6), pages 477-481, March.
    • Handle: RePEc:taf:apeclt:v:28:y:2021:i:6:p:477-481
    DOI: 10.1080/13504851.2020.1761525
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    Cited by:

    1. Garriga, Ana Carolina & Rodriguez, Cesar M., 2023. "Central bank independence and inflation volatility in developing countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1320-1341.

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