The Effects of Central Bank Independence.pptVIP

The Effects of Central Bank Independence Daniel West November 6, 2007 Based primarily on: Alesina, A. and Summers, L., Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence, Journal of Money, Credit and Banking, May 1993, 151-162 Cukierman, A., Central Bank Strategy, Credibility, and Independence, MIT Press, 1992, Ch. 20. Topics to Cover: Overview Alesina/Summers: How do we measure “independence”? Various plots of data Conclusions: Inflation negatively correlated with independence Real variables unaffected Topics to Cover: Cukierman Measuring independence Differences in studies Developed vs. undeveloped countries Two-way causality Conclusion: Not as basic as Alesina/Summers Overview “Delegating monetary policy to an agent whose preferences are more inflation averse than are society’s preferences serves as a commitment device that permits sustaining a lower rate of inflation than would otherwise be possible.” Monetary policymakers must be insulated from popular opinion, which will try to recall them when they are tight on inflation Overview There is also a theoretical case for central bank independence affecting real variables Positive effects proposed: economic stability, reducing risk premia on interest rates, avoiding political manipulation of the economy, avoiding all the detrimental economic effects of inflation Negative effects proposed: lost benefits of active monetary policy in reducing unemployment and increasing output (independent central bankers will prioritize inflation too strongly, causing an inferior social outcome) Overview These studies attempt to test the aforementioned hypotheses with actual data, in order to determine the empirical consequence of central bank independence. Methodology: Alesina/Summers How does one quantify “independence”? Two different scales: Bade/Parkin (1982) amended by Alesina (1988), and Grilli, Masciandaro, and Tabellini (1991) The study uses the average of the two scales Bade/Parkin/Ales