Central Bank Independence and Inflation: A Review Paper

Abstract

This study explores the effects on inflation in developing countries of legal central bank independence. Despite policy consensus suggesting that central bank independence is an effective tool for inflation control, there is still limited evidence, particularly for developing countries. Using a new dataset, a survey of 118 developing countries between 1980 and 2013 will examine the impact of central bank independence on inflation. We find that higher independence from central banks is correlated with lower rates of inflation. The more democratic a nation is, the greater this impact on inflation, but it is also present in non-democratic countries. According to various requirements and methodologies, our findings are solid. In addition, we find that all aspects of assessing central bank independence (targets, staff, strategy, and financial independence) contribute to curbing inflation. Our findings shed light on which types of reforms in developed countries may be more successful in combating inflation.