Inflation And Macroeconomic Performance

Seminar on Economic Policy in Europe Prof. Dr. Dirk Wentzel SS 2012

The Future of Monetary Integration in Europe after the Crisis

Topic 4: Central Bank Independence & Macroeconomic Performance

Onißeit, Mathias Bachelor International Business ID#: 303469 onimat@hs-pforzheim.de

Espinoza Chavarri, Diego Bachelor International Business ID#: 303785 espdie@hs-pforzheim.deSubmission date: 05/07/2012

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Table of Contents
List of Abbreviations .............................................................................................. II List of Illustrations ................................................................................................. III List of Tables......................................................................................................... IV

1 2 3

Abstract .............................................................................................................. 6 Introduction........................................................................................................ 6 Historical Evolution of Central Bank independence ......................................... 7 3.1 Changes inCentral Bank Independence ...................................................... 7 3.2 Reasons ...................................................................................................... 12

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Central Bank independence and Inflation........................................................ 13 4.1 Theoretical predictions............................................................................. 13

4.1.1 Impact of Inflation ................................................................................ 13 4.1.2 The Credibility Problem ....................................................................... 14 4.1.3 The Solution: Conservatism and Independence ................................... 16 4.2 Empirical findings.................................................................................... 17 Measuring Central Bank independence ............................................. 17

4.2.1

4.2.1.1 Legal Central Bank independence ................................................... 17 4.2.1.1.1 Criteria for legal Central Bank independence ............................. 17 4.2.1.1.2 Variable aggregation................................................................... 19 4.2.1.2 Governor turnover rate (TOR) ......................................................... 20 4.2.1.3 Questionnaire on Central Bank independence ................................. 20 4.2.2 4.2.3 4.2.4 5 Modeling the relationship .................................................................. 21 Results and interpretation................................................................... 21 Central Bank independence and Inflation variability......................... 24

Central Bank independence and real macroeconomic variables ..................... 25 5.1 5.2 5.3 Central Bank independence, GDP growth and investment ...................... 25 Central Bank independence and interest rates ......................................... 26Central Bank independence, wages and unemployment .......................... 28

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Criticisms of Central Bank independence ....................................................... 29 6.1 Methodological issues .............................................................................. 30

3 6.2 6.3 Subjectivity.............................................................................................. 32 Robustness................................................................................................ 35 Control Variables ............................................................................... 35 Observation Periods ........................................................................... 38

6.3.1 6.3.2 6.4 6.5 6.6 6.7

Causality...