THE INDEPENDENCE OF CENTRAL BANKS AND INFLATION: AN EMPIRICAL ANALYSIS

This paper analyzes the relationship between central bank independence and inflation in a panel of 182 countries for the period from 1970 to 2018. To gauge the degree of independence, two measures are used, the Garriga (2016) index, constructed from the laws and internal regulations of central banks, and the Dreher, Sturm and dc Haan (2008) index, based on the turnover rate of governors. The results indicate that greater central bank independence is associated with lower levels of inflation, both for high-income countries and for low and middle-income countries, as well as lower inflation volatility for the entire sample of countries. This contributes to a higher social welfare by avoiding the costs associated with high and volatile inflation. The results are robust to the use of the two alternative measures of independence, to the use of two alternative approaches to avoid simultaneity, and to the inclusion of control variables.