Central bank independence and its impact on the macroeconomic performance. Evidence from Romania before and after crisis

Year 2018, Volume: 1 Issue: 1, 46 - 65, 21.12.2018

İrina - Raluca Badea

Abstract

This paper  aims to approach an overheated topic in the
context of dynamic economies and modern democracies, namely the central bank
independence related to the adopted monetary policy strategy, as well as their
impact on the good functioning of the economy. The independence of the central
bank (CBI) is a pillar for the effectiveness of the monetary policy, providing
the premise of a credible and depolitised institution. To put it differently, a
high level of CBI may be linked to a smaller level of corruption and political
interference; therefore, the central bank has an appropriate margin of
manoeuvre, which increases financial stability. The central bank independence
has been measured under various forms after signing the Maastricht Treaty in
1992, but the initiators are Cukierman and GMT, who provided the fundamental
indices. Measuring the central bank autonomy both legally (de jure) and
informally (de facto)  represents a
complex endeavour in a dynamic and volatile socio-economic context. This
paper’s objective is to calculate CBI starting from the CUK and GMT indices,
but also to empirically approach the relationship between CBI and macroeconomic
performance, namely price stability and output (GDP). Hence, the study starts
from the hypothesis of a correlation between the GDP and CBI, on the one hand,
and between inflation and CBI, on the other hand. Numerous studies have shown
an insignificant positive correlation between independence and GDP, and also
the fact that a negative correlation between inflation and CBI is not generally
valid. Accordingly, this paper aims to demonstrate whether CBI is a viable
determinant of growth and inflation volatility. The analyzed time series
encompass the 2007-2016 period of time  and the subject of the research is the
National Bank of Romania, whose credibility in the postcrisis era is high, due
to the lack of bank failures and to the general stability and soundness of the
banking system.

Keywords

central bank independence, economic growth, inflation

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