Central Bank Reform, Liberalization and Inflation in Transition Economies

An International Perspective

A. Cukierman, G.P. Miller, B. Neyapti

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper develops extensive new data on the legal independence of new central banks in 26 former socialist economies (FSE).This data is constructed using the codification system for measuring legal independence developed in Cukierman, Webb and Neyapti (1992) and in chapter 19 of Cukierman (1992).This makes it comparable with earlier data on central bank independence (CBI) in the industrial democracies and in, non FSE, developing countries and permits experimentation with alternative indices of CBI like those reviewed in Eijffinger and van Keulen (1995).The new indices of independence indicate that central bank (CB) reform in the FSE during the nineties has been quite ambitious.In spite of the large price shocks induced by the transformation from plan to market, reformers in those countries chose to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the eighties.Based on data from 1989 through 1998 the evidence in the paper suggests that CBI is unrelated to inflation during the early stages of liberalization.But for sufficiently high and sustained levels of liberalization, and controlling for variables like price decontrols and wars, legal CBI and inflation are significantly and negatively related.These findings are consistent with the view that legal CBI, no matter how high, cannot contain the powerful inflationary impact of wide scale liberalization of formerly controlled prices.But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in slowing inflation down and the cumulative liberalization index developed by de Melo et. al.(1996) becomes relatively less important.The paper also presents evidence on factors that affect the level of CBI and examines the relation between inflation and CBI within a broader sample composed of the transition and of the developed economies.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages38
Volume2000-106
Publication statusPublished - 2000

Publication series

NameCentER Discussion Paper
Volume2000-106

Fingerprint

Central bank
Transition economies
Central bank independence
Inflation
Liberalization
Bank reform
Experimentation
Developing countries
Codification
Factors
Industrial democracy
Momentum

Keywords

  • central banks
  • economic reform
  • inflation

Cite this

Cukierman, A., Miller, G. P., & Neyapti, B. (2000). Central Bank Reform, Liberalization and Inflation in Transition Economies: An International Perspective. (CentER Discussion Paper; Vol. 2000-106). Tilburg: Macroeconomics.
Cukierman, A. ; Miller, G.P. ; Neyapti, B. / Central Bank Reform, Liberalization and Inflation in Transition Economies : An International Perspective. Tilburg : Macroeconomics, 2000. (CentER Discussion Paper).
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Cukierman, A, Miller, GP & Neyapti, B 2000 'Central Bank Reform, Liberalization and Inflation in Transition Economies: An International Perspective' CentER Discussion Paper, vol. 2000-106, Macroeconomics, Tilburg.

Central Bank Reform, Liberalization and Inflation in Transition Economies : An International Perspective. / Cukierman, A.; Miller, G.P.; Neyapti, B.

Tilburg : Macroeconomics, 2000. (CentER Discussion Paper; Vol. 2000-106).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Central Bank Reform, Liberalization and Inflation in Transition Economies

T2 - An International Perspective

AU - Cukierman, A.

AU - Miller, G.P.

AU - Neyapti, B.

N1 - Pagination: 38

PY - 2000

Y1 - 2000

N2 - This paper develops extensive new data on the legal independence of new central banks in 26 former socialist economies (FSE).This data is constructed using the codification system for measuring legal independence developed in Cukierman, Webb and Neyapti (1992) and in chapter 19 of Cukierman (1992).This makes it comparable with earlier data on central bank independence (CBI) in the industrial democracies and in, non FSE, developing countries and permits experimentation with alternative indices of CBI like those reviewed in Eijffinger and van Keulen (1995).The new indices of independence indicate that central bank (CB) reform in the FSE during the nineties has been quite ambitious.In spite of the large price shocks induced by the transformation from plan to market, reformers in those countries chose to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the eighties.Based on data from 1989 through 1998 the evidence in the paper suggests that CBI is unrelated to inflation during the early stages of liberalization.But for sufficiently high and sustained levels of liberalization, and controlling for variables like price decontrols and wars, legal CBI and inflation are significantly and negatively related.These findings are consistent with the view that legal CBI, no matter how high, cannot contain the powerful inflationary impact of wide scale liberalization of formerly controlled prices.But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in slowing inflation down and the cumulative liberalization index developed by de Melo et. al.(1996) becomes relatively less important.The paper also presents evidence on factors that affect the level of CBI and examines the relation between inflation and CBI within a broader sample composed of the transition and of the developed economies.

AB - This paper develops extensive new data on the legal independence of new central banks in 26 former socialist economies (FSE).This data is constructed using the codification system for measuring legal independence developed in Cukierman, Webb and Neyapti (1992) and in chapter 19 of Cukierman (1992).This makes it comparable with earlier data on central bank independence (CBI) in the industrial democracies and in, non FSE, developing countries and permits experimentation with alternative indices of CBI like those reviewed in Eijffinger and van Keulen (1995).The new indices of independence indicate that central bank (CB) reform in the FSE during the nineties has been quite ambitious.In spite of the large price shocks induced by the transformation from plan to market, reformers in those countries chose to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the eighties.Based on data from 1989 through 1998 the evidence in the paper suggests that CBI is unrelated to inflation during the early stages of liberalization.But for sufficiently high and sustained levels of liberalization, and controlling for variables like price decontrols and wars, legal CBI and inflation are significantly and negatively related.These findings are consistent with the view that legal CBI, no matter how high, cannot contain the powerful inflationary impact of wide scale liberalization of formerly controlled prices.But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in slowing inflation down and the cumulative liberalization index developed by de Melo et. al.(1996) becomes relatively less important.The paper also presents evidence on factors that affect the level of CBI and examines the relation between inflation and CBI within a broader sample composed of the transition and of the developed economies.

KW - central banks

KW - economic reform

KW - inflation

M3 - Discussion paper

VL - 2000-106

T3 - CentER Discussion Paper

BT - Central Bank Reform, Liberalization and Inflation in Transition Economies

PB - Macroeconomics

CY - Tilburg

ER -

Cukierman A, Miller GP, Neyapti B. Central Bank Reform, Liberalization and Inflation in Transition Economies: An International Perspective. Tilburg: Macroeconomics. 2000. (CentER Discussion Paper).