The effects of central bank independence on inflation : A study on OECD-countries

Sammanfattning: The ever-growing trends of globalization and open capital markets have changed world economics and the cooperation of monetary and political institutions. Since the breakdown of the Bretton-Woods system, defending the home currency has no longer been the main target for central banks. While flexible exchange rate regimes started dominating the area of economics, the role of the central banks changed simultaneously. Central banks nowadays focus on price stabilization, which has led to the targeting of low and stable inflation rates. Simultaneously, these new policies have increased the need for independence for central banks, in order for them to pursue their new policies. This paper analyzes whether central bank independence has an effect on inflation. The test is applied on 31 OECD-countries, over the time-span of 1998-2010. By the use of both fixed and random effects regression, higher central bank independence appears to have negative effect on inflation.