Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

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The degree of central bank independence varies considerably across countries. Several authors including Bade and Parkin (1982), Alesina (1988, 1989), and Grilli, Masciandaro, and Tabellini (1991) found that more independent central banks are associated with lower levels of inflation. This note investigates whether one can find a correlation between central bank independence and the level and variability of real economic variables such as growth, unemployment, and real interest rates. Our conclusion is that while central bank independence promotes price stability, it has no measurable impact on real economic performance.


As Rogoff (1985) notes, dynamic inconsistency theories of inflation of the type developed in Kydland and Prescott (1977) and Barro and Gordon (1983) make it plausible that more independent central banks will reduce the rate of inflation. Delegating monetary policy to an agent whose preferences are more inflation averse than are society's preferences serves as a commitment device that permits sustaining a lower rate of inflation than would otherwise be possible. Alesina and Grilli (1992) develop this argument by showing that the "median voter" would want to appoint a central banker more inflation averse than himself. However, the "median voter" wants to be "time inconsistent" and recall the central banker, who, ex post, is being too conservative on the inflation front.

Insulating monetary policy from the political process avoids this problem and helps enforce the low inflation equilibrium. Without some degree of political independence, it would be impossible to appoint a central banker more inflation averse than a majority of the voters, which is a socially desirable goal.

What about the effect of central bank independence on real variables? Maintaining the presumption that monetary policy has real effects, plausible arguments point in varying directions. Central bank independence might improve real economic performance for several reasons. First, an independent central bank that is free from political pressure may behave more predictably, promoting economic stability and reducing risk premia in real interest rates. More specifically, an independent central bank may serve to insulate the economy from political business cycles either by preventing preelection manipulation of monetary policy as in the models of Nordhaus (1975), and Rogoff and Sibert (1988) or by reducing partisan shocks to policy following elections as in the models of Hibbs (1987) and Alesina (1988, 1989). For a more extensive theoretical and empirical discussion of the politics of monetary policy and of political business cycles see Willett (1988).(1)

Second, to the extent that high inflation has adverse effects on economic performance either by creating distortions, encouraging rent seeking activity, or by raising risk premia, one would expect central bank independence to improve economic performance. If, as is often suggested (for example, Romer and Romer (1989)) most U.S. recessions result from the Federal Reserve cracking down on inflation after it has been allowed to increase too much, one might expect that more consistently inflation-averse policy would be associated with less variable economic performance.

On the other hand, traditional arguments for monetary policies that are politically responsive stress that politically sensitive central bankers are likely to be more concerned than independent bankers with increasing output and reducing unemployment and real interest rates. If monetary policy can achieve these objectives one might expect independent central banks to achieve lower rates of inflation at the price of inferior real economic performance. Rogoff (1985) provides a formal model of this trade-off; in his model more inflation-averse central bankers engage in less discretionary stabilization economic policy and therefore tolerate more cyclical variability in economic activity. …