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Central bank independence: Theory and evidence (Revised version)

  • Economics
  • Law
  • Political Science


~tr]~R T~iccu ccicin I~NNIIIIIIIIIIIIII IUbI~IIIUII~nN~I CentER for Economic Research No. 9325 Central Bank Independence: Theory and Evidence by Sylvester Eijffinger and Eric Schaling May 1993 ISSN 0924-7815 CENTRAL BANK INDEPENDENCE: THEORY AND EVIDENCE by SYLVESTER EUFFINGER AND ERIC SCHAL[NG Tilburg University, P.O. Box 90153, SOOO L.E Tilburg, The Netherlandr Revised Version April 1993 ABSTRACT On the basis of a single-stage Phillips-curve monetary policy game with extrinsic uncertainty we derive several propositions concerning the relationship between cen[ral bank independence and (the variance of) output and inflation. These propositions are tested for twelve industrial countries for the post-Bretton-Woods period (1972-1991). in testing the game-theoretic model, we use several central bank independence measures based on the central bank laws of the sample countries. 1EL Classification Numbers: C72, E58 l 1 [NTRODl1C"I'ION' Recently, there has been worldwide interest in examining the scope for greater monetary policy autonomy for the central bank. At the EC-summit in Maastricht in December 1991 a Treaty on European Economic and Monetary Union (EMU) was agrt~d upon. According to this treaty, in the final stage of EMU - i.e. by 1997 or later - the European Central Bank is supposed to assume unlimited responsibility for monetary policy. Broadly speaking, according to Alesina and Grilli (1991), the accepted Statute guarantees a central bank as independent from national and European political institutions as the Bundesbank. Furthermore, in the Pacific Basin Countries the same tendency can be discerned. Since the end of 1989 governor Mieno strengthent~ the position of the Bank of Japan with respect to the Ministry of Finance, while New-Zealand enacted legislation in February 1990 that increased the independence of its Reserve Bank. Finally, in Central Europe, the Czech Republic, Poland and Hungary have been conside- ring proposals concerning central bank

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