Monetary Policy Shifts and Central Bank Independence

Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock.

Issue Date:
Sep 09 2017
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
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Total Pages:
JEL Codes:
E30; E42; E43; E52; E58; E61; O11; O23; O57
Series Statement:
WERP 1139

 Record created 2018-03-01, last modified 2020-10-28

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