Central Bank Independence and Stability

Abstract

This study examines the impact of stability and institutional indicators on Central Bank Independence (CBI) using a fixed effects panel data analysis for 51 countries from 2008 to 2017. Stability indicators include Past Inflation, Financial Depth, Trade Openness, Total Government Debt, Current Account Balance, and GDP per Capita, while institutional indicators encompass Control of Corruption, Government Effectiveness, Political Stability, Rule of Law, Voice and Accountability, and Regulatory Quality. The analysis adopts a broader measure of CBI developed by Romelli (2022). This paper aims to enrich the literature by investigating how these indicators shape the independence of central banks in the post-global crisis era, providing valuable insights for policymakers and shedding light on essential elements that affect the autonomy of central banks. It contributes to the existing literature by considering two additional important variables- Current Account Balance and Total Government Debt- which have been largely overlooked in previous studies. Based on the panel data analysis conducted with the Driscoll & Kraay robust estimator, while all models turned out to be statistically significant, only Past Inflation, Trade Openness, Government Debt, and Control of Corruption were statistically significant at the variable level. The remaining variables did not turn out to be significant in any model.