DP3698 Monetary Policy and the Rule of Law

Author(s): Sylvester C W Eijffinger, Patrick Stadhouders
Publication Date: January 2003
Keyword(s): central banks, inflation, legal independence, reform, transition economies
JEL(s): D78, E58, K42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3698

The translation of legal independence into actual independence is primarily determined by the rule of law. Inspired by the economic growth literature, where the role of institutions already is incorporated, we introduce Institutional Quality Indicators that can be used as reasonable proxies for the rule of law in a country. This idea can be seen as an important extension of the existing empirical research about the relationship between inflation and the institutional design of monetary institutions. With the rule of law factor we will get a better expression of effective central bank independence. Transition economies like former socialist economies in Europe are interesting candidates for the examination of the relationship between the rate of inflation, central bank reforms and the transition process. Legal Transition Indicators will be used as proxy for the rule of law in these countries. The liberalization process seems to be an important condition for the effectiveness of legal central bank independence. With the Cumulative Liberalization Index we incorporate the liberalization process into our analysis.