Central Bank Independence in Transition Economies

W. Maliszewski 

CASE Foundation 

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Grilli, Masciandaro and Tabellini (1991) support previous results. In the 

regression analysis they find negative relationship between average inflation and CBI, 

as well as between inflation variability and CBI measured by GMT index. 

Alesina and Summers (1993) present an index of CBI which is the average of 

Alesina and GMT indices. By plotting this index against the inflation mean and 

inflation variability in 1955-88 period, they detect inverse relationship between CBI 

and inflation performance (average rate and variability). 

Cukierman (1992) and Cukierman et al (1992) test various hypothesis on the 

relationship between inflation performance and CBI. They regress the depreciation in 

the real value of money (defined as p/(1+p), where p is inflation rate) on the their 

disaggregated measures

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 of legal independence and governor's turnover rate (for the 

sample of seventy countries over four periods). In the whole sample (developed and 

developing countries pooled together) the overall contribution of legal variables is 

insignificant. The overall contribution of the legal variables is significant at the 0.22 

level in the sub-sample of developed countries and insignificant for developing 

countries. The governor's turnover rate is significant in the whole sample and in the 

sub-sample of developing countries but insignificant in the sub-sample of developed 

economies. This outcome confirms that the “behavioural” characteristics are better 

measures of CBI for developing countries and reveals significant relationship between 

CBI and inflation in this group. The results weakly support the presumption that the 

legal aspects of CBI affect inflation in developed countries. The regression of the 

depreciation in the real value of money on the aggregated index of legal independence 

(LVAU) and on the variable measuring the compliance to the law (ratio of the actual 

average term in office to the legal term in office) support these conclusions. The legal 

index is significant and compliance variable is insignificant in the sub-sample of 

developed countries. The opposite is true for developing countries. In another 

regression the questionnaire based measures of independence are related to the 

depreciation in the real value of money. They are significant (al least at 0.10 level), 

entering disaggregated or aggregated. The turnover rate added to this regression is also 

significant, indicating that this two measures account for different dimensions of 

independence. 

Eijffinger et al. (1997) check the sensitivity of the relationship between CBI and 

inflation to the use of different indices of independence. They regress average inflation 

rate and variance of inflation separately on Alesina, GMT, ES and Cukierman's LVAU 

indices. The regression is done on the sample of twenty industrial countries over the 

period 1972-92 and two sub-periods (1972-82 and 1983-92). Measures of CBI are 

significant in all regressions for average inflation rate and in some regressions for 

inflation variability. Because the coefficients in these regressions are not easy to 

interpret, Eijffinger et al. (1997) estimate relationships between the log of inflation and 

the log of CBI indices. Estimated elasticity of inflation to CBI is significant in most 

cases and varies from -0.4 (LVAU index) to -0.7 (Alesina index) for the whole period. 

The estimation results give strong support to the inverse relationship between CBI and 

the average inflation and some support to the negative relationship between CBI and 

inflation variability. 

                                              

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 i.e., initially aggregated into eight legal variables (see description above). 

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