Central bank independence and inflation volatility in developing countries

Abstract

This paper analyzes the effects of legal central bank independence (CBI) on inflation volatility in developing countries. We discuss why CBI should curb inflation volatility, independently from its effect via lowering inflation levels. Empirical analyses in a sample of 96 developing countries between 1980 and 2014 show that CBI is directly and unconditionally associated with lower volatility. The magnitude of this effect is larger in more democratic countries even after accounting for the endogeneity of CBI and inflation. Our results are robust to alternative measurements of the main variables, different model specifications, and methodologies.

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