Central Bank Independence, Inflation and Growth in Transition Economies
Abstract
In this paper, we document two empirical relationships that have emerged as the former communist countries have taken steps to transform their economies from command systems to market-based systems. First, increased central bank independence has tended to improve inflation performance. Second, high inflation has adversely affected real activity. More specifically, in the first section of this paper, we develop indices of central bank independence (CBI) for twelve transition economies and examine the relationship between CBI and inflation performance across these countries. Statistical evidence suggests that the transition economies with more independent central banks have achieved lower inflation than their counterparts. The second section of this paper studies the relationship between inflation and growth in twenty-six transition economies. We present econometric evidence indicating that reducing inflation helps stabilize economic activity, following the sharp output declines that occur during the initial stages of transition. The paper conc1udes that establishing an independent central bank is a concrete institutional reform that may reduce inflation and thus facilitate economic growth.
Abstract In 1his paper, we document two empirical relationships iliat have emerged as ilie former communist countries have taken steps to transform their economies from command systems to market-based systems. First, increased central bankindependencehastendedto improveinflation performan<;e. Second, high inflation has adversely affected real activity. More specifically, in the first sec;tion ofiliis paper, we develop indices ofcentral bank independence (CBI) for twelve transition economies and examine the relationship between CBI and inflation performance across iliesecountries. Statisticalevidence suggestsiliatthetransitioneconomieswithmore independent central banks have achieved lower inflation than their counterparts. The second section ofthis paper studies ilie relationship between inflation and growth in twenty-six transition economies. We present econometric evidence indicating iliat reducing inflation helps stabilize economic activity, following ilie sharp output declines iliat occur during ilie initial stages oftransition. The paper conc1udes iliat establishing an independent central bank is a concrete institutional reform iliat may re:duce inflation and thus facilitate economic grow1h.
Cite this document
Prakash Loungani and Nathan Sheets (1995). Central Bank Independence, Inflation and Growth in Transition Economies (IFDP 1995-519). Board of Governors of the Federal Reserve System, International Finance Discussion Papers. https://whenthefedspeaks.com/doc/ifdp_1995-519
@techreport{wtfs_ifdp_1995_519,
author = {Prakash Loungani and Nathan Sheets},
title = {Central Bank Independence, Inflation and Growth in Transition Economies},
type = {International Finance Discussion Papers},
number = {1995-519},
institution = {Board of Governors of the Federal Reserve System},
year = {1995},
url = {https://whenthefedspeaks.com/doc/ifdp_1995-519},
abstract = {In this paper, we document two empirical relationships that have emerged as the former communist countries have taken steps to transform their economies from command systems to market-based systems. First, increased central bank independence has tended to improve inflation performance. Second, high inflation has adversely affected real activity. More specifically, in the first section of this paper, we develop indices of central bank independence (CBI) for twelve transition economies and examine the relationship between CBI and inflation performance across these countries. Statistical evidence suggests that the transition economies with more independent central banks have achieved lower inflation than their counterparts. The second section of this paper studies the relationship between inflation and growth in twenty-six transition economies. We present econometric evidence indicating that reducing inflation helps stabilize economic activity, following the sharp output declines that occur during the initial stages of transition. The paper conc1udes that establishing an independent central bank is a concrete institutional reform that may reduce inflation and thus facilitate economic growth.},
}