Central bank independence as a prerequisite for ensuring price stability: Modeling the role of the national pattern

Abstract

Ensuring price stability is a dominant function of the central bank. Empirical studies on various statistical samples give conflicting results regarding the influence of central bank independence on the inflation rate. The study offers a methodology for assessing the role of the formation of a national pattern of central bank independence in ensuring price stability. Calculations were made for 53 countries of the world using a combination of cluster analysis tools and panel regression modeling. The cluster analysis carried out at different time intervals of the study allowed defining three patterns of the formation of central bank independence. The changes in the clusters characterizing the peculiarities of the national patterns of central bank independence shows that for a number of countries there is no stable national pattern. Modeling based on panel data showed that when forming a country pattern “Limited level of central bank independence”, an increase in the level of independence of the central bank by one unit on average leads to an increase in the inflation rate by 7.09%. On the other hand, in the countries with the national patterns of central bank independence “Dominance of the institutional and financial component of ensuring the independence of the central bank” and “Dominance of the personal and functional component of ensuring the independence of the central bank”, the expected consequence of increasing the level of independence of the central bank by one unit is to reduce the inflation rate by an average of 3.32% and 6.03%, respectively.

Keywords

• central bank
• financial independence
• functional independence
• independence
• inflation
• institutional independence