Academic journal article Eastern Africa Social Science Research Review

Measuring the Statutory Independence of Sub-Saharan Africa Central Banks

Academic journal article Eastern Africa Social Science Research Review

Measuring the Statutory Independence of Sub-Saharan Africa Central Banks

Article excerpt

Abstract:

This study evaluated the degree of legal independence of 14 Sub-Saharan Africa central banks using the CWN (1992) approach. Central bank independence, i.e. freedom from political pressure in the conduct of monetary policy, is an attempt to overcome the inflationary bias inherent in the trade-off between inflation and unemployment reflected in the Phillips curve. Comprising, Angola, Botswana, Ethiopia, Ghana, Kenya, Namibia, Nigeria, Malawi, Mauritius, South Africa, Tanzania, Uganda, Zambia and Zimbabwe, the sample study produced interesting results. Namibia, for instance, scored the highest in terms of legal independence with Zimbabwe the lowest score. The results were then compared against CWN (1992) study. The initial results showed that in the majority of instances, there had been a marginal improvement in legal independence after 1990 and were confirmed by t-tests.

Keywords: Central bank independence, price stability, statutory independence,

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

The economic meltdown in Zimbabwe at the beginning of the 21st century culminated in hyperinflation, leading to the collapse of the Zimbabwe dollar and reignited the debate on central bank independence (CBI). The purpose of this study is to answer the question, "to what extent are Sub-Saharan Africa (SSA) central banks legally independent?" Granting legal or formal independence to a central bank is one way of improving an economy's inflationary performance, according to Alesina (1988) and Grilli, Masciandaro and Tabellini (1991).

This study focuses on measuring legal independence, and not actual independence due to complications in finding an objective measure of actual independence. However, this is not to say that the measure of legal independence is objective; the weighting scheme is arbitrary. Even Cukierman, Webb and Neyapti (CWN) (1992) acknowledge that their weighting scheme is simply designed to minimize data-availability problems. Furthermore, if consistently applied over time, it gives us a means of comparison across countries. That is its major advantage.

This study updates the Sub-Saharan Africa portion of the Cukierman, Webb and Neyapti (1992) study and extends it from 1990 to 2011, in the process narrowing a gap in the academic literature.

The rest of this paper is structured as follows: Section 2 reviews the literature; Section 3 gives the methodology employed in measuring statutory independence; Section 4 presents the findings whilst Section 5 concludes and makes recommendations.

2. LITERATURE REVIEW

This section explores the definition of central bank independence and then assesses the theory available to support the concept of central bank independence and how it can be measured.

2.1. The Concept of Central Bank Independence

Central Bank Independence (CBI) can be defined as independence from political influence and pressures in the conduct of its functions, particularly monetary policy. This independence can be categorized into two types: goal independence, that is, the ability of the central bank to choose its own goals for monetary policy; and instrument independence, that is, the ability of the central bank to independently choose the instruments of monetary policy required to achieve these goals (Mishkin 2000; Bongiwe 2006).

When Fry et al. (2000) investigated how central bank practitioners defined independence, they found that there were 60 usable responses which they distilled into eight factors that were mentioned by central bankers as important in the definition of independence. Clearly, Fry et aids findings suggest that practitioners do not agree on a single definition of independence and that each one's response is tempered by the history and circumstances that they find themselves in. From our perspective, there is no "silver bullet" definition of independence, but is a constellation of factors. Hence, the need to examine the legal statutes to determine how thorough a job has been done to ensure legal independence. …

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