An empirical analysis of central bank independence in sub-Saharan African countries

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Gu_Samuel_2018_BA_Thesis.pdf (543.47 KB)

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2018-04

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Abstract

Often, central bank independence (CBI) is seen as one of the optimal institutional devices to guarantee price stability. The ample literature on CBI suggests that CBI is negatively correlated with inflation. Consequently, the turn of the 20th century has seen several countries enshrine in their central bank’s charter what its limits of independence are. Empirical studies on central bank independence, however, yield inconclusive results due, in part, to the difficulty in conceptualizing and measuring CBI. In the literature, the often-used indicators of CBI, legal-based CBI indices are based on the autonomy enjoyed by central banks as covered in their charter. Other attempts have been made to estimate the actual independence enjoyed by central banks. Empirical studies on CBI using either legal-based indices or estimates of actual CBI have yielded unrobust results that are very sensitive to the used CBI indicator. In developing countries, this issue is more profound as most studies use legal-based CBI indices in empirical studies. This study adopts the methodology of Eijffinger, Rooij, and Schaling (1996) to estimate an empirical CBI index. Together with a legal-based index of CBI obtained, the study carries out a Pearson correlation between the two measures of CBI and inflation in 14 sub-Saharan African countries from 1990-2016. The findings are as follows: when the legal-based CBI indicator was used, the correlation between central bank independence and inflation was almost non-existent, inconclusive and statistically insignificant. On the other hand, when the empirical CBI index was employed to perform the Pearson’s correlation between inflation and central bank independence, the results were consistent with theory. More importantly, empirical results proved to be sensitive to the CBI indicator employed.

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Thesis submitted to the Department of Business Administration, Ashesi University, in partial fulfillment of Bachelor of Science degree in Business Administration, April 2018

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monetary policy, monetary policy implementation, central banks, inflation-fighting policies

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http://hdl.handle.net/20.500.11988/390

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