Central Bank Independence in Transition Economies

W. Maliszewski 

CASE Foundation 

16

and at the market rate. In addition more independent bank sets the discount rate, does 

not participate in the primary market for public debt and is not engaged in commercial 

banks supervision. The last point requires more attention. The GMT argument against 

placing the banks supervision under the CB control is that the instruments such as 

portfolio constraints or ceiling to private bank loans may administratively increase the 

private demand for Government securities and facilitate deficit financing. According 

to GMT it “can weaken Central Bank independence by removing part of monetary 

control from the market”. Cukierman (1996) argues that placing the banking 

supervision under the CB authority makes the Bank more vulnerable to political 

pressure. In the presence of bank failures there is a high risk that bad debts will be 

monetised. Placing the supervision outside CB makes the costs of rescue operations 

more transparent. On the other hand, when supervision is under CB control, the 

Central Bank may use the precise information on the banking system to improve 

conducting of monetary policy. In addition, the personnel needed for supervision and 

conducting monetary policy seems to be complementary which is another argument 

for placing supervision under the CB control. Thus the use of this criterium in the 

GMT index is ambiguous 

Eijffinger and Schaling (1993) (ES) critically examine and compare previous 

indices. They present their own index of political independence in twelve industrial 

countries, building on GMT but assessing together the relationship between the 

government and the bank and the formal goal of the monetary policy. The index is 

based on three criteria: assessment of the bank authority over monetary policy, 

presence of government officials in the board and procedure for board appointments. 

Double weight is attached to the first variable which contains evaluation of the bank 

authority against the government and the final goal of the monetary policy. 

Cukierman (1992, ch. 19) and Cukierman, Webb and Neyapti (1992) build an 

index for nineteen industrial economies and forty-nine developing countries for four 

periods: 1950-59, 1960-71, 1972-79 and 1980-89. The index consists of four groups of 

variables covering position of the chief executive officer, policy formulation, central 

bank objectives and limitations on lending. There are sixteen legal variables which are 

given numerical values from 0 (lowest level of independence) to 1 (highest level of 

independence). Number of independence levels varies across variables depending on 

the precision of law. Variables are initially aggregated into eight legal variables (five 

concerning limitations on lending). Finally, eight variables are aggregated into a 

unweighted (LVAU) and weighted (LVAW) indices. These indices contains broader 

range of independence characteristics than the previous ones, although a substantial 

subjective judgement is involved in choosing the fineness of the variables 

characterisation, as well as selection of variables and weights in both stages of 

aggregation.