International Finance Discussion Papers (IFDP)
August 1995
Central Bank Independence, Inflation and Growth in Transition Economies
Prakash Loungani and Nathan Sheets
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.
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.