Central bank independence, financial market development and inflation
Author(s)
Advisor
Neyaptı, BilinDate
2008Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Abstract
Central bank independence (CBI) and inflation relation has long been a
debate and is established in many studies, such as Bade and Parkin (1982), Alesina
(1988, 1989), Grilli, Masciandaro, and Tabellini (1991), and Cukierman, Webb and
Neyaptı (1992). Although these studies address the negative relation between CBI
and inflation, they do not consider the effect of the development level of financial
markets on this relation. Posen (1995) considers the effect of financial market
development by using effective financial opposition to inflation formed by the
inflation-averse groups. He tests the effect of this variable on CBI and inflation
simultaneously. He claims that the variable, which decreases inflation is effective
financial opposition to inflation (when used with CBI) rather than CBI. Thus, he
states that rather than analyzing the direct relation between inflation and CBI, the
effect of effective financial opposition to inflation on CBI and inflation should be investigated. Based on this study, this thesis looks at the effect of financial market
development (FMD) both on CBI and on the relation between CBI and inflation by
using alternative indicators for FMD. We find that there is a significant and positive
relation between CBI and FMD for non-transition countries. Moreover, although
Posen (1995) states that CBI does not have a significant effect on inflation when
EFOI is included as an additional explanatory variable, we find evidence that both
FMD and CBI have a significant effect on inflation. However, the results of the
estimations are not robust to changes in samples.