Central Bank Independence and Inflation - The Continuing Debate

This book is an investigation of the relation between central bank’s independence (CBI) with regard to influencing inflation. Considering proxies of CBI together with other macroeconomic variables (42 countries for the period 1960-2009), the study identifies determinants of inflation with particular focus on the CBI-inflation nexus. Employing Ordinary Least Square (OLS) and Maximum Likelihood (ML) estimations, it was found that CBI affects inflation only when both the developed and the developing countries are considered together, but not when the sub-samples are considered independently. Results are interpreted with a degree of caution because a measure of CBI is an indistinct demonstration. In particular, the extent of an economy’s openness has been found to be especially significant in influencing inflation (at both aggregate and disaggregate levels). GDP, historical inflationary trend, lack of political stability and high debt-GDP ratio have been additionally identified as significant factors influencing inflation (for the whole sample only and not when the developed and developing countries are considered in a mutually exclusive manner).