Central Bank Independence in Transition Economies

 2.1.2. Behavioural Indices of CBI 

Indices based on the legal status cover only one aspect of an overall 

independence. Central bank law cannot be complete in separating the authority 

between legislature, executive and the bank and even if it is explicit, it does not have 

to be binding in practice. Tradition or governor's personality may, among others, 

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significantly influence central bank behaviour. Cukierman (1992) and Cukierman et al. 

(1992) propose two “behavioural” indices of independence. First one is based on an 

average turnover of the governor in 1950-89. It is argued that, below some threshold, 

shorter term in office disables the governor to implement long-run policy and thus 

makes him more susceptible to political pressure and less independent . This index has 

two drawbacks. It may be argued that the subservient governor can stay in office 

longer than the one who follows his own, independent policy. Secondly, the index 

does not capture the “conservative bias” of the bank, i.e., its independence in pursuing 

the objective of price stability. Despite of these drawbacks the turnover rate seems to 

be a good measure of independence for developing countries, where the general 

adherence to the law is weaker than in Western democracies. This tentative conclusion 

is supported by the fact that the turnover rate in developing countries is much higher 

and more variable than in developed economies.  

Another “behavioural” index presented by Cukierman (1992) and Cukierman et 

al (1992) is based on questionnaire sent to the central banks' staff. The questionnaire 

contains questions on legal aspects of independence, actual practice where it differs 

from that codified by law, monetary policy objectives, targets and instruments. 

Correlation between legal and questionnaire-based indices of CBI is low, indicating 

that these two measures reflect different dimensions of independence. However, the 

correlation is significantly higher for a group of developed countries where the 

compliance with the law is higher. 

Cukierman and Webb (1995) build an index based on political vulnerability of 

the central bank governor. They find that the average propensity to replace the 

governor is significantly higher after political transition than in other periods. The cut-

off between “political” and “non-political” period is six months. Vulnerability within 

this period is three times higher in developing countries than in developed economies 

and can be interpreted as another “behavioural” index of independence.