ENFERMEDAD DE MEMBRANA HIALINA

C ountry Q uestionnaire-based index of central bank independence Germany, Fed. Rep. 1.00 Costa Rica 0.81 Finland 0.78 Auslralia 0.76 Ilaly 0.73 Denmark 0.73 Bahamas, The 0.71 Luxembourg 0.66 France 0.65 Uniled Kingdom 0.64 South Africa 0.64 Zaire 0.61 Lebanon 0.59 Ireland 0.57 Barbados 0.54 Uganda 0.53 Uruguay 0.49 Belgium 0.47 Turkey 0.44 Tanzania 0 3 8 Peru 022 Yugoslavia 0.17 Ethiopia 0.13 TABLE 2.16

Subsequently, Cukierman turns in his analysis to the relationship between inflation and central bank independence. The general hypothesis is that inflation is negatively related to CBI which is based on presumptions put forward by the theoretical literature on ‘rules versus discretion'. However, legal independence of a central bank is neither a necessary nor a sufficient condition for low inflation, as the findings by

Cukierman and other authors have shown.

In order to investigate the relationship between CBI and inflation, Cukierman regressed inflation on various indices of CBM^, related the index of legal CBI and the turnover rate of central bank governors to a transformed inflation rate (D), which represents the annual real depreciation of a given amount of money, with D = jc / (1 + 3t), where jc is the inflation rate. The transformed inflation rate takes a value from 0 to

1.0. The results of the regression of D on disaggregated indices of legal CBI are statistically insignificant. Cukierman, therefore, carried out another regression with the aggregate index of legal independence. This time, the aggregate legal variable is statistically significant for the group of industrial countries, which indicates that laws

do make a difference. The contrary is observed for the set of developing countries, for which the statistical evidence does not reveal that the central bank constitution contributes to explaining the variations of inflation rates across periods and between countries. The turnover rate for the subsample of industrial countries is insignificant, whereas it is highly significant for the developing countries. Figure 2.2^^^ illustrates the relation between the results obtained for the two subsamples, industrial and developing countries.

Inflation (D)

A

developing

industrial

Legal Independence

developing industrial

Turnover Rate

FIGURE 2.2

The left graph shows the partial relation between the aggregate index of legal CBI and

the transform ed inflation rate (D). The significance of legal central bank

details about the regression procedure can be found in Cukierman et. al. ( 1992) Cukierman ct al. (1992)

Measures of Central Bank Independence

independence for the inflationary record in industrial countries is indicated by a

downward-sloping line. The horizontal line, which displays the results obtained for

the developing countries, shows that legal independence does not affect average inflation in this subsample of countries. The right graph reveals the partial relationship between the turnover rate of central bank governors and the transformed

inflation rate (D). The upward-sloping line indicates that the an increasing turnover rate induces increasing inflation in developing countries. The low and short horizontal line shows that the rate of inflation and the turnover rate are generally lower in the industrial countries.

Previous studies, in particular by Alesina and Grilli et al. focused exclusively on the legal data and found a strong negative relation between the rate of inflation and CBI. Cukierman's indices of independence differ from those constructed in previous papers and it might be instructive and informative to re-examine the earlier results by applying Cukierman's index in order to make the outcomes comparable and to put them into perspective. In summary, Cukierman's results show an inverse relation between legal independence and inflation in industrialised countries, but not in

developing countries. In the latter group, the actual turnover rate of central bank governors turns out to be a better proxy to describe the actual independence of the central bank. There is a significant divergence between legal independence and actual independence in developing countries which is due to factors, such as sudden regime shifts and political instability.

2.7 The Alesina-Summers Index of CBI

Alesina and Summers investigate in their paper whether there is a correlation between CBI and the level and variability of real economic variables. The index of central

bank independence used in this investigation is a synthetic index, product of an averaging procedure between the index of CBI by Bade and Parkin and a conversion from the GMT index of CBI to BP. The conversion is based on the following rule:

GMT index (i) conversion

i> 11 4

7 < i < l l 3

4 < i < 7 2

i < 4 1

The central banks are ranked from 4 (most independent) to 1 (least independent). The resulting Alesina-Summers index of independence is shown in column four of the following table.