Central Bank Independence in Transition Economies

Central Bank Independence… 

S&A No. 120 

27

start of the transformation the political consensus on the role of the Bank in managing 

the monetary policy was lower. New, market environment was not fully accepted and 

there was a substantial pressure on the Bank to act as the Government's fiscal agent. 

Consequently, the degree of independence was lower than, e.g., in Czech and Slovak 

Republic. Currently, the Bank's law in Hungary has been substantially amended. In 

Poland, the new Constitutional Law prohibits the Government's borrowing from the 

Central Bank. Although the new laws are helpful in establishing the credibility on the 

international markets, the crucial determinant of the amendments is a necessity for 

harmonisation of the law with European standards. Integration with the European 

Union and, probably in the next step, entering the European Monetary System requires 

adopting the strict Maastricht criteria for CBI. 

The third factor influencing the Bank independence, the width of financial 

markets, seems to be also important in establishing CBI. The high degree of 

independence in “advanced” countries would be impossible without the substantial 

financial markets' development (see Table 3). The prohibition of financing the budget 

deficit by the Central Bank credit would be hardly possible if the Governments were 

not able to borrow on the well organised financial markets. Difficulties with financing 

the deficit seem to be the main obstacle in building the independence in former Soviet 

Republics and less advanced Central European countries.