Central Bank Independence in Transition Economies

 

 

 

Editor: Bartosz Klin 

 

 

 

© CASE — Center for Social and Economic Research, Warsaw 1997 

 

ISBN  83-7178-045-1 

 

 

 

Publisher: 

 

CASE — Center for Social and Economic Research 

Bagatela 14 

00-585 Warsaw, Poland 

tel.: [phone] 

fax: [phone]  

e-mail: [e-mail] 

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Central Bank Independence… 

S&A No. 120 

3

Contents 

Introduction................................................................................................................. 4 

1. Central Bank Independence (CBI) in Economic Theory........................................ 4 

1.1. Why Do Policymakers Like Inflation?............................................................ 5 

1.1.1. Phillips Curve and the Employment Motive for Monetary Expansion ... 5 

1.1.2. Revenue Motive for Monetary Expansion............................................... 5 

1.1.3. Balance of Payment Motive for Devaluation........................................... 6 

1.1.4. Financial Stability and Monetary Expansion........................................... 7 

1.2. Models of Monetary Policy Games................................................................. 7 

1.2.1. Basic Model ............................................................................................. 7 

1.2.2. Political Monetary Cycles ........................................................................ 9 

1.3. Reducing Inflationary Bias — Imperfect Information and Reputation ........ 10 

1.4. Reducing Inflationary Bias — Conservative Central Banker ....................... 11 

1.4.1. Rogoff's (1985) Model ........................................................................... 11 

1.4.2. Alleviating the Credibility vs. Flexibility Trade Off ............................. 12 

1.4.3. Credibility vs. Flexibility Trade Off and Political Monetary Cycles .... 13 

1.4.4. Reducing Inflationary Bias — Optimal Contracts................................. 13 

2. Empirical Works on Central Bank Independence ................................................ 13 

2.1. Indices of Central Bank Independence (CBI) ............................................... 14 

2.1.1. Indices of Legal CBI .............................................................................. 14 

2.1.2. Behavioural Indices of CBI.................................................................... 15 

2.2. CBI and Inflation Performance ..................................................................... 16 

3. Central Banks in Transition Economies ............................................................... 18 

3.1. Specific Features of Transition Economies................................................... 18 

3.2. Previous Works on CBI in Transition Economies ........................................ 19 

3.3. Indices of Legal Independence...................................................................... 21 

3.3.1. Political Independence ........................................................................... 21 

3.3.2. Index of Economic Independence.......................................................... 22 

3.4. Overall Independence and Determinants of CBI .......................................... 24 

3.5. Inflation Performance.................................................................................... 26 

3.6. CBI and Inflation Performance ..................................................................... 27 

3.6.1. Measures of Inflation ............................................................................. 27 

3.6.2. Overall Index and Inflation Performance .............................................. 28 

4. Conclusions........................................................................................................... 31 

References................................................................................................................. 32 

Appendix — Central Bank Laws in Transition Economies ..................................... 35