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Central bank independence and inflation: a note.

Article Excerpt
I. INTRODUCTION

A remarkable achievement among industrialized nations during the past two decades is the dramatic decline in annual inflation rates. A long line of research dating to Kydland and Prescott (1977) and Barro and Gordon (1983a, 1983b) has argued that larger degrees of central bank independence can improve average inflation rates? Hence, a natural question to ask is: How much of the improved inflation performance of the industrialized nations can be attributed to increased central bank independence?

To answer this question, we use two measures of central bank independence from two different points in time. The first is the measure of independence used by Alesina and Summers (1993), which represents a measure of independence for the period 1955-1988. Second, we use a more recent measure of independence reported by Fry et al. (2000), which is derived from a central bank survey conducted in 1997. We restrict our analysis to the industrialized nations. Since many of our nations are now part of the European Central Bank (ECB), we restrict the time frames to 19551988 (the original time frame in Alesina and Summers [1993]) and 1988-2000 (pre-ECB).

We report three principal results. First, measured independence has significantly increased across time for nearly all the central banks in the survey. The average independence score rose from an index of 59 to an index of 83. Second, the slope of the linear relationship between inflation and independence that was originally reported in Alesina and Summers (1993) is statistically identical to the fitted slope in the more recent data. This suggests some stability in the inflation-independence trade-off. Third, using this fitted slope, we deduce that increased independence is responsible for nearly two-thirds of the decline in the inflation rates for industrialized countries as a whole.

II. DATA AND RESULTS

All the data used for this analysis are reported in Table 1. The first three...

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