Society’s aversion to inflation, an outgrowth of financial sector development, has increased over time in twenty-eight excommunist countries, resulting in lower inflation. Since the 1990s, central banks (CBs) throughout the world have been granted a greater degree of legal independence in the formulation and implementation of monetary policy. Nowadays, CBs in both developing and emerging countries enjoy higher political and economic autonomy compared to the CBs in developed economies in the late 1980s, while price stability is commonly specified as the primary objective in CB laws (Arnone et al. 2007). The trend toward increasing central bank independence (CBI) can be explained by three major factors: first, negative experience with discretionary policies during the 1970s, which produced poor macroeconomic performances (high inflation accompanied by slow growth); second, advances in economic theory, especially the “time inconsistency” and “inflationary bias” literature; and third, the empirical evidence on the negative association between inflation and CBI, suggesting that greater CBI may be beneficial for maintaining price stability. Consequently, all these developments have led to the predominant view that governments possess a built-in tendency to exploit inflation for achieving some shortrun political goals. Thus, a consensus has emerged that isolating CBs from political influence may be beneficial in delivering low inflation.
Reducing Inflation in Ex-Communist Economies. Independent Central Banks Versus Financial Sector Development
SERGI, Bruno Sergio
2012-01-01
Abstract
Society’s aversion to inflation, an outgrowth of financial sector development, has increased over time in twenty-eight excommunist countries, resulting in lower inflation. Since the 1990s, central banks (CBs) throughout the world have been granted a greater degree of legal independence in the formulation and implementation of monetary policy. Nowadays, CBs in both developing and emerging countries enjoy higher political and economic autonomy compared to the CBs in developed economies in the late 1980s, while price stability is commonly specified as the primary objective in CB laws (Arnone et al. 2007). The trend toward increasing central bank independence (CBI) can be explained by three major factors: first, negative experience with discretionary policies during the 1970s, which produced poor macroeconomic performances (high inflation accompanied by slow growth); second, advances in economic theory, especially the “time inconsistency” and “inflationary bias” literature; and third, the empirical evidence on the negative association between inflation and CBI, suggesting that greater CBI may be beneficial for maintaining price stability. Consequently, all these developments have led to the predominant view that governments possess a built-in tendency to exploit inflation for achieving some shortrun political goals. Thus, a consensus has emerged that isolating CBs from political influence may be beneficial in delivering low inflation.Pubblicazioni consigliate
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