Central Bank Independence in Transition Economies

W. Maliszewski 

CASE Foundation 

28

persistent inflation at about 30%. In Bulgaria and Romania stabilisation programs are 

more difficult and the high inflation re-emerged recently

15

. 

Figure 2 

Annual inflation rates (end-year) in the low and moderate inflation group 

0.00

5.00

10.00

15.00

20.00

25.00

30.00

1-Dec-94

1-Dec-95

1-Dec-96

Croatia

Czech Rep.

Hungary

Latvia

Poland

Slovakia

Slovenia

 

Source: IMF IFS 

Figure 3 

Annual inflation rates (end-year) in the high-inflation group 

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

1-Dec-94

1-Dec-95

1-Dec-96

Belarus

Bulgaria

Georgia

Kyrgystan

Romania

Russia

Ukraine

 

Source: IMF IFS, AECD Monthly Business Survey (Bulgaria), Georgian Economic Trends, 

National Bank of Kyrgystan 

 

                                              

15

 In 1997 both countries managed to stabilise the price level (Bulgaria adopted the currency 

board arrangement) 

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Central Bank Independence… 

S&A No. 120 

29

3.6. CBI and Inflation Performance 

3.6.1. Measures of Inflation 

Although the countries in this group vary considerably in the progress of 

transformation process it may be argued that all of them faced similar shocks related to 

economic reforms. Thus it is reasonable to assume that the differences in their 

macroeconomic performance may be, to some extend, explained by institutional 

settings such as the CB legal independence. However, the time horizon chosen to the 

analysis is inevitably short. In 1996 all countries were in the transformation process 

since at least two years but the macroeconomic imbalances “inherited” from the 

previous system and the transformation shocks had considerable effects on economies 

where the stabilisation and market reforms began later. In case of transformation 

countries it is impossible to assess the long-run relationship between independence and 

the mean inflation discussed in the CBI theory. Differences in inflation performance 

over the volatile, three years period can not provide any decisive conclusions. From 

statistical viewpoint the mean inflation is hard to estimate due to short time horizon 

and evident non-stationarity in some inflation series (especially in less advanced 

economies). To draw any conclusions on the significance of the CBI-inflation 

relationship I assume that the data generating process has recently changed in the high-

inflation countries and has become stationary. This supposition seems to be justified 

given the fast disinflation path in the least advanced countries and relatively stable 

inflation in 1996. Under this assumption, the annual inflation in 1996 is taken as an 

estimate of the mean for all countries. This inflation rate is interpreted as an 

“equilibrium” inflation that the Banks deliver given their policy objectives and the 

degree of independence.