Modelling Central Bank Independence and Inflation: Deus Ex Machina?

Open access

Abstract

Central bank independence represents the core element of assessing the complex relationship between government and central bank, having at background the fundamental issue of a free monetary policy decision-making process from the hands of the political circle. However, central bank independence is a multilevel concept within some social, economic and behavioral implications both for the central banks and for the society at whole. Central bank independence is needed in order to establish an autonomous central bank with a high degree of freedom in choosing its’ instruments, objectives, techniques and tactics. Moreover, a high degree of transparency for the public disclosure and monitoring of central bank operation and transaction is needed for the social barometer of the central bank. Consequently the central bank must have a high degree of accountability and responsibility vis - á - vis of the most democratic institution, i.e. Parliament. In this article it is presented a comprehensive study regarding the complex relationship between central bank independence and inflation by modeling these two monetary policy panacea, in order to make a fine tuning regarding the causal relationship established in a heterodox manner.

1. Adolph, C., 2013. Bankers, Bureaucrats, and Central Bank Politics: The Myth of Neutrality (Cambridge Studies in Comparative Politics), Cambridge University Press.

2. Aziz, N., 2005, Power Delegation of European Central Bank’s democratic deficit, American Economic Journal 3, pp. 537-550.

3. Bibow, J., 2004, Reflections on the current fashion for central bank independence, Cambridge Journal of Economics 28, pp. 549 - 576.

4. Campoy, J, Negrete, J., 2008, Optimal central banker contracts and common agency: a comment, Public Choice 137, pp. 197-206.

5. Ciccarone, G., Marchetti, E., 2012, Optimal linear contracts under common agency and uncertain central bank preferences, Public Choice 150, pp. 263-282.

6. Cukierman, A., 1992. Central bank strategy, credibility and independence - Theory and Evidence, MIT Press.

7. Cukierman, A., Webb, S.B., Neyapti, B., 1992. Measuring the Independence of central banks and its effects on policy outcomes, The World Bank Economic Review 6.

8. Cukierman, A., Webb, S.B., 1995. Political influence on the central bank: International evidence, The World Bank Economic Review 9.

9. De Haan, J., Masciandaro, D., Quintyn, M., 2008. Does central bank independence still matter? European Journal of Political Economy, 24, 717-721.

10. Dumiter, F., 2013. Banca centrala ca ramura a birocratiei, in vol. II, Studii si Cercetari Financiar - Monetare, Studii post-doctotale in economie, Disertatii Post-Doctorale, Editori Acad. Ioan Paun Otiman, Prof. univ. dr. Cornel Ionescu, Prof. univ, dr. Emil Dinga, Ed. Academiei Romane, pp. 500 - 560.

11. Eijffinger, S.C.W., Geraats, P., 2006. How transparent are central banks? European Journal of Political Economy, Vol. 22, pp. 1-21.

12. Hughes Hallet, A., Libich, J., 2011. Explicit inflation target and central bank independence: friends or foes? Econ Change Restruct, Springer, pp.1-27.

13. Iversen, T., 1999. The political economy of inflation: Bargaining structure or central bank independence? Public Choice, 99, 237-258.

14. Klomp, J., de Haan, J., 2010. Central bank independence and inflation revised, Public Choice, 144, 445-457.

15. Laurens, B.J., Arnone, M., Segalotto, J-F, 2009. Central Bank Independence, Accountability and Transparency - A Global Perspective, International Monetary Fund, Palgrave MacMillan.

16. Masciandaro, D., Quintyn, M., Taylor, M., 2008. Inside and outside central bank: Independence and accountability in financial supervision, Trends and determinants, European Journal of Political Economy, 24, 833-848

17. Miles, W., Vijverberg, C.P., 2011. Formal targets, central bank independence and inflation dynamics in the UK: A Markow-Switching approach, Journal of Macroeconomics, 33, pp. 644-655.

18. Ollala, M.G., Gomez, A.R., 2011. Robust Control and central bank behavior, Economic Modelling, 28, pp. 1265-1278.

19. Siklos, P., 2008. No single definition of central bank independence is right for all countries, European Journal of Political Economy 24, pp. 802-816.

20. Siklos, P., Bohl, M., Wohar, M., 2010. Challenges in Central Banking - The Current Institutional Environment and Forces Affecting Monetary Policy, Cambridge University Press.

21. Thisani, N.K., 2008. Building Credible Central Banks: Policy Lessons for Emerging Economies, Palgrave MacMillan Studies in Banking and Financial Institutions.

22. Tognato, C., 2012, Central Bank Independence: Cultural Codes and Symbolic Performances (Cultural Sociology), Palgrave MacMillan.

23. Touffut, J-P, 2008. Central Banks as Economic Institutions, The Cournot Centre for Economic Studies Series, Edward Elgar.

24. Vaderhart, P.G., 2009. What is the best way to impede a central bank? The Quarterly Review of Economics and Finance, 49, pp. 784-779.