Revisiting the institutional determinants of central bank independence

ABSTRACT

Reform towards greater central bank independence is generally seen as intertwined with institutional development more broadly. However, the largest empirical study to date on the determinants of central bank independence found a negative relationship to institutional quality variables. This paper argues that this is related to sample length: using a different dataset for central bank independence with a considerably longer sample, institutional variables are found to be positive and highly significant determinants of central bank independence.

KEYWORDS:

• Central bank independence
• institutions
• democratic accountability
• bureaucracy quality
• political stability

JEL CLASSIFICATION:

• E02
• E58
• O11

Acknowledgments

This work has benefitted from helpful comments from Ashraf Khan, Hiroko Oura, Helene Poirson Ward and Vikram Haksar. Tania Mohd Nor provided excellent research assistance.

Disclosure statement

No potential conflict of interest was reported by the author.

Disclaimer

The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Definitions of these institutional variables can be found at http://info.worldbank.org/governance/wgi/#doc.

² Other studies tend to focus on specific political factors, rather than institutional determinants in general. For instance, Crowe and Meade (2008) and Bodea and Hicks (2015) examine CBI in relation to democracy versus dictatorship. Using the dataset of Garriga (2016), Agur (2018) analyzes the impact of political nationalism on CBI. See de Haan and Eijffinger (2019) for a survey of the literature on the politics of CBI.

³ The index of Cukierman, Webb, and Neyapti (1992) measures de jure independence, and an increase in de jure independence does not always translate into de facto independence (Cukierman 2008). However, de jure independence of a central bank is often a prerequisite for de facto independence and successful monetary reform more broadly (Freedman and Ötker-Robe 2010).

⁴ The World Bank’s Database of Political Institutions goes back to 1975 for many countries, but only covers political data, which would not provide close coverage for the types of institutional variables used in Dincer and Eichengreen (2014).

⁵ More direct measures of trust, from the World Values Survey, are only available for a small subset of countries during our sample period.

⁶ Details on the ICRG methodology can be found at: https://www.prsgroup.com/wp-content/uploads/2012/11/icrgmethodology.pdf .

⁷ GDP per capita and inflation variables are taken from IMF WEO, while trade openness and financial depth are sourced from World Bank data.