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

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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