Central Bank Independence in Transition Economies

W. Maliszewski 

CASE Foundation 

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CBI in countries under investigation. It should result in more credible monetary policy 

and is crucial in view of future EU membership.  

3.3. Indices of Legal Independence 

An assessment of legal provisions for CBI has twofold purpose. The CBI is a 

proxy for actual independence and, by relating it to the inflation performance, one can 

empirically test the predictions of the monetary policy games' theory in a group of 

transition countries. Furthermore, the question of great practical importance is how 

institutional settings affect monetary policy and inflation in post-communist 

economies. 

The sample covers fourteen countries: six former Soviet republics (Belarus, 

Georgia, Kyrgystan, Latvia, Russia and Ukraine) and eight Central European countries 

(Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovak Republic and 

Slovenia). This choice was dictated either by the data availability (Bank’s laws) or 

institutional settings (Estonia and Lithuania adopted currency boards thus their ability 

to conduct monetary policy is limited). The main legal characteristics of the Central 

Banks in these economies, with some additional information on the adherence to the 

law in practice, are presented in the appendix. The information on political and 

economic independence, defined as in GMT (1991), are summarised in Tables 1 and 2 

and aggregated into two indices respectively

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. The structure of indices is similar to 

GMT but there are few important differences. Firstly, I use different criteria for 

evaluation of the Governor's appointment procedure. The nomination from the 

President is given two asterisks, from the Parliament one asterisk and from the 

Government none. It takes into account the characteristic feature of less advanced 

transition economies, namely the populism and the anti-reformatory stance of some 

Parliaments. I also assume that the bank is more politically independent if the 

provisions for dismissal of governing body's member, as stated in the law, are non-

political only (like, e.g., loss of ability to perform his duties or sentence for a criminal 

act). Consequently the new variable is added to the political index. The political 

pressure on the Bank's management is more likely to be influential if the members of 

the governing body can be easily removed from their office. In addition, in the 

political index the parliament or government approval of monetary policy is regarded 

as a limitation to CBI (instead of the government approval only as in GMT). In the 

index of economic independence the CBI is higher if the Bank charges market or basic 

interest rate on its credit to the government (in GMT only the market rate). Although 

this provision makes the Bank more prone to the Government financial needs, it is 

surely better than no limitation on the interest rate at all. 

                                              

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 I have not used the Cukierman (1992) methodology since, although much more precise in 

selecting the relevant elements of the law, the Cukierman index involves a substantial subjective 

judgement in choosing the weights' structure. The GMT index is less subjective and much more 

transparent. Secondly, the overall index does not allow for an inference based on the partial order 

within the group. The definitions of the simple and partial orders are given in the next section. 

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