Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 143: Why Do Politicians Implement Central Bank Independence Reforms?

Sven-Olov Daunfeldt (), Jörgen Hellström and Mats Landström
Additional contact information
Sven-Olov Daunfeldt: The Ratio Institute, Postal: The Ratio Institute, P.O Box 3203 , SE-103 64 Stockholm, Sweden
Jörgen Hellström: Department of Economics, Umeå University
Mats Landström: Department of Economics, University of Gävle

Abstract: This paper is a first empirical attempt to investigate why politicians around the world have chosen to give up power to independent central banks, thereby reducing their ability to fine-tune the economy. A new data-set covering 132 countries, of which 89 countries had implemented such reforms, was collected. Politicians in non-OECD countries were more likely to delegate power to independent central banks if their country has been characterized by a high variability in historical inflation and if they faced a high probability of being replaced. No such effects were found for OECD-countries.

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

JEL-codes: E52; E58; P48

43 pages, October 7, 2009

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