Dissertation: Central Bank Independence Matters
18.12.2012
Central bank independence refers to a central bank's independence from political institutions and political pressure. In her dissertation, Aleksandra Masłowska, Licentiate of Social Sciences, examines the effect of central bank independence on inflation. The research indicates that broader independence leads to lower inflation within the political economy.
Masłowska's research is based on broad statistics, spanning three decades, from 70 countries. However, in evaluating the results, it should be noted that they are partially affected by the way central bank independence is measured and by the research method used. Nonetheless, the dissertation indisputably suggests that central banks' independence from political institutions improves economic performance by holding down long-term inflation.
Many former communist countries in Europe serve as an example of how inflation fell from high figures at over 10 per cent, to a moderate five per cent when central banks were granted independence. Another example of a successful low-inflation policy is Germany, whose experiences of hyper-inflation in the 1920s led to an emphasis on the independence of the Bundesbank, Germany's central bank.
Argentina is an example of the opposite, having pursued an unsuccessful fight against high inflation, economic imbalances and lack of competitiveness for decades. In light of the research, it is unsurprising to find that the central bank of Argentina is highly dependent on political authority.
Although the significance of central bank independence has been noted by several researchers, no single, extensive study exists that measures central bank independence and its problems.
Masłowska's unique research is based on a broader range, than previous studies, of central bank independence measures. The differences between these measures and uncertainty about how central bank independence can be definitively measured in empirical research have created the need to discover an alternative method of measuring independence.
The research seeks to solve this problem by examining the Taylor rule, using Sweden and the United Kingdom as examples. The Taylor rule is used to analyse changes in the political focus of a central bank. Masłowska's research conclusively demonstrates that central bank independence influences the Taylor rule's estimation outcomes, when comparing the situation before and after an institutional change affecting a central bank's independence.
Many former communist countries in Europe serve as an example of how inflation fell from high figures at over 10 per cent, to a moderate five per cent when central banks were granted independence. Another example of a successful low-inflation policy is Germany, whose experiences of hyper-inflation in the 1920s led to an emphasis on the independence of the Bundesbank, Germany's central bank.
Argentina is an example of the opposite, having pursued an unsuccessful fight against high inflation, economic imbalances and lack of competitiveness for decades. In light of the research, it is unsurprising to find that the central bank of Argentina is highly dependent on political authority.
Although the significance of central bank independence has been noted by several researchers, no single, extensive study exists that measures central bank independence and its problems.
Masłowska's unique research is based on a broader range, than previous studies, of central bank independence measures. The differences between these measures and uncertainty about how central bank independence can be definitively measured in empirical research have created the need to discover an alternative method of measuring independence.
The research seeks to solve this problem by examining the Taylor rule, using Sweden and the United Kingdom as examples. The Taylor rule is used to analyse changes in the political focus of a central bank. Masłowska's research conclusively demonstrates that central bank independence influences the Taylor rule's estimation outcomes, when comparing the situation before and after an institutional change affecting a central bank's independence.