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Central Bank Independence and Macroeconomic Performance - Seminar on The Future of Monetary Integration in Europe after the Crisis

Central Bank Independence and Macroeconomic Performance - Seminar on The Future of Monetary Integration in Europe after the Crisis

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Published by mathue84
1. Abstract
This paper critically analyzes the historical evolution of central bank independence, its theoretical foundations and the empirical studies on its impact on inflation and real macroeconomic variables. The results show that to date, no reliable confirmation of the favorable effect of central bank independence on price stability has been provided. Moreover, several aspects of the underlying theory remain questionable. The impact of central bank independence appears to be contingent upon other factors that have yet to be explored in detail.
1. Abstract
This paper critically analyzes the historical evolution of central bank independence, its theoretical foundations and the empirical studies on its impact on inflation and real macroeconomic variables. The results show that to date, no reliable confirmation of the favorable effect of central bank independence on price stability has been provided. Moreover, several aspects of the underlying theory remain questionable. The impact of central bank independence appears to be contingent upon other factors that have yet to be explored in detail.

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Published by: mathue84 on Nov 16, 2013
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 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 Espinoza Chavarri, Diego Bachelor International Business Bachelor International Business ID#: 303469 ID#: 303785 onimat@hs-pforzheim.de espdie@hs-pforzheim.de Submission date: 05/07/2012
 
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Table of Contents
List of Abbreviations .............................................................................................. II List of Illustrations ................................................................................................. III List of Tables ......................................................................................................... IV 1 Abstract .............................................................................................................. 6 2 Introduction........................................................................................................ 6 3 Historical Evolution of Central Bank independence ......................................... 7 3.1 Changes in Central Bank Independence ...................................................... 7 3.2 Reasons ...................................................................................................... 12 4 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 4.2.1 Measuring Central Bank independence ............................................. 17 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 Modeling the relationship .................................................................. 21 4.2.3 Results and interpretation ................................................................... 21 4.2.4 Central Bank independence and Inflation variability ......................... 24 5 Central Bank independence and real macroeconomic variables ..................... 25 5.1 Central Bank independence, GDP growth and investment ...................... 25 5.2 Central Bank independence and interest rates ......................................... 26 5.3 Central Bank independence, wages and unemployment .......................... 28 6 Criticisms of Central Bank independence ....................................................... 29 6.1 Methodological issues .............................................................................. 30
 
3 6.2 Subjectivity .............................................................................................. 32 6.3 Robustness................................................................................................ 35 6.3.1 Control Variables ............................................................................... 35 6.3.2 Observation Periods ........................................................................... 38 6.4 Causality .................................................................................................. 39 6.5 Disinflationary credibility ........................................................................ 44 6.6 Wage demands ......................................................................................... 47 6.7 Alternatives .............................................................................................. 48 6.7.1 Forms of exchange rate fixation ......................................................... 48 6.7.2 Inflation contracts ............................................................................... 49 6.7.3 Inflation targets .................................................................................. 50 7 Conclusion ....................................................................................................... 50 References.............................................................................................................. 52

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