Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 920: Social Trust and Central-Bank Independence

Niclas Berggren (), Sven-Olof Daunfeldt () and Jörgen Hellström
Additional contact information
Niclas Berggren: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Sven-Olof Daunfeldt: HUI Research AB, Postal: and Department of Economics, Dalarna University
Jörgen Hellström: Umeå School of Business and Economics, Postal: Umeå University

Abstract: Central banks have been made more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm that there is such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust levels, the need for central-bank independence is strong enough to dominate the low ability; at high trust levels the ability for reform is high and dominates the low need; at intermediate trust levels there is neither need nor ability strong enough to generate very independent central banks.

Keywords: Trust; Credibility; Reforms; Monetary Policy; Inflation; Central Bank; Time Inconsistency

JEL-codes: E52; E58; P48; Z13

25 pages, May 23, 2012

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