Legal central bank independence and inflation in various phases of transition

Abstract

The transition environment of 11 EU member countries has created an exceptional opportunity for research on the influence of legal central bank independence (LCBI) on inflation within significantly different circumstances in comparison to developed Western countries. I construct my own transformed GMT (TGMT) model for estimation of the LCBI, researching transition in its early stages and later on, thus comprising the total period of transition. Even in early stages of the transition LCBI has significantly negative effects on inflation. In later phases all the countries show evidently high levels of the LCBI and low inflation rates, but in this phase increasing the LCBI would not result in decreasing the inflation rate. Only studying the entire period of the transition would show that LCBI has significant negative influence on inflation, clearly showing different levels of the LCBI and inflation, which was not so obvious in shorter intervals. Moreover, negative influence of the LCBI on inflation does not change even if I add budget deficit as an independent variable to my research.

Some Aspects of Actual CBI and Inflation in the Countries of Southeast Europe

“…The author has also concluded that the higher level of the actual central bank independence is no more correlated to the lower inflation rate once monetary stability is already obtained. Furthermore, Piplica (2015) has also transformed and upgraded GMT model and has researched the influence of the central bank independence to the monetary stability in transition countries EU members in early and in later phase of the transition process. The author has concluded that in the early and in the whole transition period there is a significant negative influence of the legal central bank independence to the inflation, but that this is not so obvious in the latter phase of the transition.…”