Central Bank Independence in Transition Economies

2.1. Indices of Central Bank Independence (CBI) 

2.1.1. Indices of Legal CBI 

Relevant elements of the central bank's law are aggregated into indices of legal 

independence by several researchers. Nearly all these papers are devoted to central 

banks in developed economies. First empirical work on CBI in twelve industrial 

countries was presented by Bade and Parkin (1988) (BP). They focus on three 

elements affecting CBI: the relationship between government and bank in the 

formulation of monetary policy, the procedure for appointing the board of the bank 

and the financial relations between the bank and the government. First two features 

characterise political independence (defined as the capacity to choose policy goals), 

the last one describes financial or budgetary independence. Political independence is 

assumed to be highest if the bank is the final policy authority, there is no government 

official in the board and more than half of the bank board members are appointed 

independently of the government. The smaller is the number of these attributes, the 

lower is political independence. The resulting index can take integer values from 1 

(zero attributes) to 4 (all three attributes). Thus, equal weights are attached to all 

variables. 

Alesina (1988, 1989) presents similar index of political independence, extending 

their sample to seventeen industrial economies. Numerical values of these two indices 

are identical for all countries in the BP sample, except for Italy which was given lower 

value. 

Grilli, Masciandaro and Tabellini (1991) (GMT) focus on political and economic 

independence of the Central Bank. The political independence, defined as the capacity 

of the monetary authority to choose the final goal of policy, is influenced by three 

elements: relationship between government and bank in the formulation of monetary 

policy, the procedure for appointing the board and the formal goal of the bank with 

respect to monetary policy. These elements are operationalised by eight criteria: 

appointment procedure for the high officials of the bank (the governor and the board), 

length of their term in office, participation of the government representative in the 

board, government approval of monetary policy, legal provision strengthening the 

bank's position against the government in case of conflict and statutory obligations to 

maintaining price stability. GMT index of political independence is a sum of these 

equally weighted characteristics. Authors define economic independence as the 

capacity to choose the instruments of monetary policy. This aspect of independence is 

assumed to be affected by legal constraint on central bank's lending to the government 

and the location of the banking supervision. The bank is assumed to be more 

independent if the direct credit facility is of limited amount, not automatic, temporary 

---