Central Bank Independence in Transition Economies

partial 

independence to the Central Bank by retaining an option to override Bank's decisions. 

However, there is a positive cost for the policymakers associated with the use of this 

“escape clause”. This cost is a determines the Bank's independence. The Central Bank 

anticipates that the policymakers will override its decision if the sufficiently large 

output shock occurs. In effect the Bank follows a non-linear policy: the zero-inflation 

rule in “normal” times and, to avoid being overridden, more accommodative policy 

                                              

4

 Eijffinger et al (1995) derived a closed-form solution to the model, i.e., the optimal degree of 

conservativness. 

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