CENTRAL
BANK INDEPENDENCE AND INFLATION PREFERENCES: NEW EMPIRICAL EVIDENCE ON THE
EFFECTS ON INFLATION
Louka T. Katseli
University of
Athens, Greece
Anastasia Theofilakou
Bank of Greece and
University of Athens
Kalliopi-Maria Zekente
Alpha Bank and
University of Athens
ABSTRACT
On theoretical grounds, a clear distinction exists between central bank independence and inflation aversion. In
the conduct of monetary policy, both contribute to lower inflation. In this
paper, we empirically re-examine the nexus between central bank independence
and inflation for a large sample of advanced and developing countries over the
period 1992-2014 by explicitly accounting for the effect of central bank
inflation preferences on inflation developments. Our evidence suggests that both
features matter for mitigating inflationary pressures, in line with the
relevant theoretical studies. Central bank independence alone seems not to be a
sufficient condition to curtail inflation; the expected inverse relationship
between central bank independence and inflation appears to hold when we account
for the (inflation) conservatism of the central bank. At the same time, higher
central bank conservatism seems to result in lower inflationary pressures in
the economy. Our results do not support the hypothesis of an interaction (either
as substitutes of complements) between the degree of independence and
conservatism of the central bank.
Keywords: Central bank independence, inflation conservatism, System GMM
JEL classification: E52, E58
Acknowledgements: The authors would like to thank Heather Gibson,
Dimitrios Moschos, and Evangelia Papapetrou as well as the participants at the
7th PhD Meeting in Economics for valuable comments and suggestions. Our
research is being funded by the National and Kapodistrian University of Athens
(Greece) via European Structural Funds. The views expressed in the paper are
those of the authors and should not be attributed to the institutions with
which they are affiliated.
Correspondence:
Anastasia Theofilakou
Bank of Greece
Economic Analysis and Research Department
21 E Venizelos Ave
Athens, 10250, Greece
Tel: +30 210 320
Email: atheofilakou@bankofgreece.gr