Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 95: Are Central Bank Independence Reforms Necessary for Achieving Low and Stable Inflation?

Sven-Olov Daunfeldt (), Mats Landström and Niklas Rudholm
Additional contact information
Sven-Olov Daunfeldt: HUI Research, Postal: SE-103 29 Stockholm, Sweden, Dalarna University, SE-781 88 Borlänge, Sweden
Mats Landström: University of Gävle, Postal: SE-801 76 Gävle, Sweden
Niklas Rudholm: HUI Research, Postal: SE-103 29 Stockholm, Sweden, Dalarna University, SE-781 88 Borlänge, Sweden

Abstract: Using data on the occurence of central bank independence (CBI) reforms in 131 countries during 1980-2005, we test whether they were important in reducing inflation and maintaining price stability. CBI reforms are found to have reduced inflation on average 3.31% when countries with historically high inflation rates are included. But countries with lower inflation have reduced it without institutional reforms granting central banks more independence, undermining the theoretical time-inconsistency case for CBI. There is furthermore no evidence that CBI reforms have helped reduce inflation variability.

Keywords: inflation; institutional reform; monetary policy; time-inconsistency

JEL-codes: E52; E58; P48

36 pages, July 6, 2013

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