Central Bank Independence: Impact of CBI Reforms on Inflation Rate

This assignment delves into the intricate relationship between central bank independence (CBI) and inflation rates across various countries, examining both theoretical and empirical aspects. It investigates the effects of CBI reforms on reducing inflation, drawing upon secondary data analysis to understand the dynamics between governments and central banks. The study aims to analyze the advantages of implementing CBI reforms, particularly in addressing time inconsistency problems. It explores differing viewpoints, such as the negative correlation between CBI levels and inflation rates, and the influence of political instability. Furthermore, the assignment discusses the pillars of central bank independence—legal and political independence, monetary policy conduct, and transparency and accountability—and their impact on inflation, referencing various studies and economic models to provide a comprehensive overview. Desklib offers a platform to explore similar assignments and study resources.

Running head: EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION
RATE
Effects of Central Bank Independence on Inflation Rate
Name of the Student
Name of the University
Author note

1EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Abstract
The main purpose of the assignment is to analyse the actual effect of the CBI reforms on the
inflation rate in different part of the countries with both empirical and theoretical aspects. The
entire study helps in focusing the different effects of CBI reforms on reducing the rate of
inflation in different parts of the world. The study has been done based on the secondary data
analysis that helped them in solving the issues in an effective manner.
The main aim and purpose of the assignment was to understand the different analysis of the
CBI reforms on rate of inflation as this helped the government institutions to take such
measures effectively.

2EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Table of Contents
Chapter 1....................................................................................................................................3
Introduction................................................................................................................................3
1.2 Research Questions..........................................................................................................4
Chapter 2:...................................................................................................................................4
2.1 Introduction......................................................................................................................4
2.2 Literature Review.............................................................................................................5
Structure of the Index.................................................................................................................7
The model...................................................................................................................................8
Chapter 3: Research Methodology.............................................................................................9
3.1 Types of Investigation:.....................................................................................................9
3.1.1 Justification of the type of Investigation chosen:....................................................10
3.2.1 Justification of the Data Collection Method Chosen:.............................................11
3.4 Accessibility Issues:...........................................................................................................12
3.5 Ethical Issues:.....................................................................................................................12
3.6 Data Analysis Plan:............................................................................................................12
3.7 Research Limitations:.....................................................................................................13
Chapter 4: Structure of the Proposed Dissertation:..................................................................14
Chapter 5: Time Horizon (Gantt chart)....................................................................................15
References................................................................................................................................16

3EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Chapter 1
Introduction
In the year 1609, Bank of Amsterdam helped in establishing a precursor of central
bank. The effects of the Central Bank Independence on inflation rates has to be discussed as
this will help in focusing on the different issues that has been faced by central banks. The
Central Bank is the banking institution that has entire responsibility for issuing different
currency, regulation of supply of money and managing the rate of exchange that helped in
supervising commercial banks along with different other kind of financial institutions.
Furthermore, it can be seen that there is close relationship between government and
central bank. It has been seen that there are different countries wherein the government will
help in adopting economic kind of policy that will help in encouraging the growth and reduce
the rate of unemployment(Gürkaynak et al. 2015). The relationship between the non-
independent central bank and government that will help in analysis of advantages of CBI-
reforms. The purpose of the assignment is to analyse the different kind of relationships
between governments and central bank along with effect of inflation in different parts of
world.
It helps in analysis of the negative kind of relationship between CBI level and rate of
inflation wherein the next sections will discuss the techniques through which the lowering
inflation that is always not credible in nature. The different kind of benefits and advantages
will be discussed in the next chapters regarding the CBI reforms. The different kind of aims
and objectives relating to the CBI norms will be discussed in the next chapters.
1.1 Aims and objectives
The main aim and objectives of the study are as follows:

4EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
To analyse the effect of CBI reforms on inflation in different parts of world
To analyse the relationship between the different governments along with central
banks
To analyse the advantages of implementing CBI reforms on the problem of time
inconsistency
1.2 Research Questions
The research questions are discussed as follows:
What will be the effect of the CBI reforms on inflations in different parts of world?
What are the different kind of advantages between different government institutions along
with central banks?
Chapter 2:
2.1 Introduction
The next chapter is related to the literature review on analysing the effect of
independence of central bank on the rate of inflation. The different analysis is required to be
identified in an effective manner as this will help in understanding the effect of the CBI
reforms on the rate of inflation(Bodenstein, Erceg and Guerrieri 2017). The entire literature
review will help in understanding the different CBI reforms as this will help in achieving the
stable kind of information in an effective manner. The literature review will help in
discussing the different totalitarian countries, the CBI reforms do not affect the inflation rates
of such countries.
The different view of the authors will be addressed in the next section of literature
review that will help in analysing the political kind of instability and the effect of
independence of central bank in an effective manner(Reis 2015). In short, the governments
benefit from central bank that helped them in increasing the supply of money in an effective

5EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
manner. There are different kind of frameworks that has to be considered effectively for
assessing the different effects in an effective manner. The policy framework that is monetary
in nature will help in influencing the activity that is macroeconomic in nature in three
different manners that are as follows:
There is short-term trade-off between inflation levels and unemployment that can be
shown with the help of Phillips curve trade off
There is long-run trade off between the different fluctuations in inflation along with
real activity that can be shown with the help of Taylor trade off
The trend growth will be shown as real GDP
2.2 Literature Review
According to Blancheton(2016), there is a negative kind of relationship between level
of the bank interdependence of central bank along with inflation. However, on the other hand,
it can be seen that Edwards (2015) commented that CBI has no influence on lowering of the
inflation and there is requirement of the different investigation required for the same as well.
It can be seen that there are different countries such as North America, Oceania and Northern
Europe that will help them in understanding the effects of CBI on inflation in different
countries(Fernández-Alberto 2015).
Moreover, there are different kind of previous studies that helped in indicating the
various countries that faced different kind of effects of CBI reforms. Doumpos, Gaganisand
Pasiouras(2015)concluded that problems related to inflation has to be solved as this will help
in focusing on the change of the CBI in place of level of CBI. Moreover, it can be seen that
Bodea and Higashijima(2017) used different random effects along with random model of
coefficient that helped them in showing that the different reforms of CBI are not relevant and
it was that the CBI reforms were not in connection with effecting the rate of inflation.

6EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Sims (2016) commented that the governments will benefit from the central banks and
this will help them in increasing the supply of the money along with inflation. The expanding
the government expenditure will be funded with credits from different non-independent kind
of central banks. On the other hand, Neuenkirchand Neumeier(2015) commented that most of
the government institutions in the entire world prefer to utilize the economic policy that is
expansive in nature financed by different kind of supply of money as this will help the
companies in balancing the supply of money in an effective manner.
Furthermore, the main objectives of the central bank helped in stabilizing the
consumer price index as this will help in facilitating and maintaining equilibrium of the
balance of the payments that is international in nature(Rey 2015). The economic kind of
recession and stagflation will be caused that will affect the increase in inflation along with
supply of money. It helped in formulating the monetary policy that will deal with the rate of
inflation and this will help the central bank to create positive effect on the rate of inflation as
well(Bodea, and Hicks 2015).
Furthermore, it can be seen that there are different kind of effects of inflation on long
term growth wherein there are different kind of studies that has been conducted and this has
helped in understanding the entire relationship between economic growth and inflation that
will help in analyzing that low kind of inflation is good for the entire growth of the economy
in an effective manner. Masciandaro and Romelli (2015) commented that there are different
kind of studies that has been conducted wherein it has been seen that basic funding is that the
higher rate of inflation goes along with the economic growth that is low in nature.
Furthermore, it has been seen that there are adverse effects of the higher rate of inflation on
the different economic kind of outcomes that is essential in nature (Garriga 2016).

7EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
This kind of pattern has helped in showing that the rate of inflation is in excess
amount that is more than 15-20% that cannot be isolated and this will be requiring extra effort
in making the rate of inflation effective. The new kind of index of the central bank
independence along with the targeting of influence has few linkages that have to be analyzed
in an effective manner. The entire new kind of index of the central bank independence and
the targeting that was constructed in an effective manner and is conceived as the sum of
numerical values that is assigned to more than thirty eight arrangements that is institutional in
nature.
It has been seen that there are different kind of circumstances wherein the companies
need to understand the issues between the independence of the central bank and the rate of
inflation. There are different issues in the rate of inflation wherein the different kind of
sources of pillars has to be analyzed and identified in an effective manner. The central bank
independence has to be analyzed in such a manner that wills the company in solving such
issues effectively. These kinds of services have to be analyzed effectively as this will include
the involvement of the three different pillars of the central bank independence along with the
rate of inflation.
Structure of the Index
There are different kind of pillars of the entire index that includes the legal and
political kind of central bank wherein the central bank independence refers to the different
freedom and flexibility that is required to be permitted to the entire central bank by
legislation. There are different empirical findings that have helped in analyzing that the
central bank refers to the different legislative protection of the different policy and
operational formulation kind of activity in the way or process that is required to be enforced
wherein the law will be enforced in an effectual manner.

8EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
The second kind of pillar is the central bank conduct of monetary policy and conduct
of governance that will include different kind of features that include monetary policy
strategies and monetary policy objectives along with the policy of exchange rate in an
effective manner. This kind of second pillar will help in supervision of the bank, fiscal and
financial independence (Masciandaro and Romelli 2015).
The third kind of pillar of the entire index is the central bank transparency along with
accountability. The transparency in the central bank will help in understanding the degree of
the understanding of the entire monetary policy along with process of policy decisions by the
public in an effectual manner. Furthermore, it has been seen that the central bank have been
associated with the different kind of secrecy as the central bank will become more
independent that will have to be more accountable in nature.
The model
The entire empirical evidence on the entire performance of the central bank’s
independence that do not suggest qualified access. However, there are different kind of cases
wherein the consistency of the indices are based on different kind of interpretations of the
statuses of the central bank independence and this helps in analyzing as well as measuring the
independence of the central bank. In addition, there are correlations between the central bank
independence along with the performance of the different kind of variables that is
macroeconomic in nature. It is the feature of the data wherein it has been seen that the rate of
average inflation control the entire economy and it is lower in nature before and after the
different kind of treatments of the law (Bodea and Higashijima 2017).
Furthermore, it has been seen that increase in the real growth of the gross domestic
product of the flexible kind of inflation rates is the remarkable kind of outcome. It has been
seen that the magnitude of the effect of the central bank independence has helped in

9EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
understanding that the other forces will help in contributing towards the increase in the
growth of the real GDP (Fernández-Albertos 2015). There are different kinds of curves that
have different effects that will include analysis of the different kind of issues that will help in
understanding such issues in an effectual manner.
The different independence of the central bank has helped in understanding and
analyzing that the high degree and level of central bank political along with legal kind of
independence. It helps in analyzing the economic literature that helps in providing impact of
the central bank independence in an effective manner. One of the different kinds of
comprehensive studies has helped in understanding that there is a relationship between the
inflation rate and central bank independence. It helps in confirming that there is negative kind
of relationship between independence and inflation rate that has to be analyzed in an effectual
manner. However, there are different kind of contributions that is required to be made in an
effectual manner wherein it helps in understanding that the variability of the rate of interests
wherein it is measured by understanding the remarkable differences in the rate of inflation
and this will help in generating huge amount of differences in the outcomes of the inflation in
an effective manner (Gürkaynak et al. 2015).
Lastly, it has been seen that the different kind of empirical data and results will help
in understanding the relationship between the different inflation rate and central bank
independence. The different kind of analysis has been done that has helped in understanding
the relationship between the two factors and this will help in analyzing the huge effect and
impact of the central bank independence on the inflation rate.

10EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Chapter 3: Research Methodology
The research methodology of a paper consists of the different techniques which are
generally used by a researcher in order to carry out the study in connection to the given topic.
Research methodology can be defined as the process by which the study in regard to a paper
is conducted in a systematic manner. It helps to carry out the research in a systematic manner.
3.1 Types of Investigation:
There exist three types of investigation which are as follows.
 Exploratory- This is adopted in a situation where the researcher does not possess
a clear idea of the concerned topic.
 Descriptive—the descriptive manner is adopted when there are a vast number of
theories and concepts available for the given topic.
 Hypothesis- This method is used whereby a hypothesis is developed which is
based on the research in order to determine the validity of the hypothesis.
3.1.1 Justification of the type of Investigation chosen:
For this research, the hypothesis research study will be used whereby an econometric
model which will be designed using secondary data and the relationship between the CBI
reforms and inflation in the various parts of the world will be tested in order to find out
whether there exists a negative correlation between the two factors.

11EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
3.2 Data Collection Method:
Figure 1- Data collection Process
(Source: Author)
When a research has to be conducted, especially in the domain of Finance, a database
is required. The data which will be collected will be done using secondary data. In secondary
data, the given data is usually collected from secondary sources like books, articles and
journals.
In a primary data collection, the data is collected using various surveys and interview
processes.
3.2.1 Justification of the Data Collection Method Chosen:
In this research, the secondary data collection method will be used whereby the
researcher will be collecting data from various articles and sources. Data set from 130
DATA COLLECTION METHOD
PRIMARY DATA
COLLECTION
SECONDARY DATA
COLLECTION

12EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
countries will be used from a period of 1990-2017. Correlation and regression will be
performed on the given data set with the help of which the objective will be completed.
3.4 Accessibility Issues:
While the research is being conducted, the researcher might face certain problems
related to the data set which is required for the research. He may not be able to identify the
appropriate data required for the hypothesis.
3.5 Ethical Issues:
While the research will be conducted, the ethicality needs to be maintained in all
aspects. As per the Data Protection Act, 1998, while a researcher is conducting the research,
the privacy of data needs to be maintained strictly. In a scenario if the researcher fails in
maintaining the ethicality then, he shall be held liable for breaching.
3.6 Data Analysis Plan:
Data analysis plan is of two types, namely,
 Quantitative Data Analysis
 Qualitative Data Analysis
For the given research, the researcher shall be relying on the quantitative data
analysis. In this analysis, the outcomes and procedures will be attempted on the data set
collected from 130 banks from a period 1990-2017. The reason why this method will be
chosen is because, the topic requires hypothetical testing which is only possible using data.
If there exists a relationship between the central bank`s independence and the inflation
rate then the null hypothesis will be rejected else it will be accepted.

13EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
3.7 Research Limitations:
The limitations that will be faced by the researcher will be the limitations with regard
to the data which will be collected for the given subject. Time and budget are the two primary
limitations.

14EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Chapter 4: Structure of the Proposed Dissertation:
The given dissertation paper shall comprise of five primary chapters. The first chapter
will be throwing light on the background of the study which will consist of the aims and
objectives of the given research. The second chapter will consist of the; literature review
whereby the relevant theories and the concepts related shall be discussed. The third chapter
will be a reflection of the methodology of the data used for the research, sources of secondary
data and data analysis technique. The fourth chapter shall analyze the secondary data using
correlation and regression whereby the hypothesis will be proved. The final chapter shall
comprise of a conclusion and state certain recommendations for the research.

15EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
Chapter 5: Time Horizon (Gantt chart)
Activity Days(March-April)
1-
8th
March
1
0-15th
Marc
h
16-
18th
March
1
9-
22nd
Marc
h
2
3-26th
Marc
h
27
th
March
- 04th
April
5
- 8th
April
Finalizing the research topic
Collecting data from the secondary
sources
layout of the research work
Literature review
Formation of the research plan
Selecting appropriate research methodologies
Collection of datafrom primary sources
Analyzing the data sets
Interpretation of collected data sets
Concluding the Study
Designing of rough draft
Submitting the Final Work
Table 3.1: Time Line of Research

16EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
(Source: Created by the author)
From the timeline of the entire research, it can be analyzed that there are different kind of
tasks that has to be completed effectively on time and this will help in solving and finishing
the entire task within the specified deadline. There can be different hurdles in completing the
task that has to be properly initiated and taken into action to complete the tasks effectively.
The submission of the final task will help in understanding the different gaps or loopholes in
the task that will help in understanding the requirement of different strategies that can solve
the task in an effectual manner.

17EFFECTS OF CENTRAL BANK INDEPENDENCE ON INFLATION RATE
References
Blancheton, B., 2016. Central bank independence in a historical perspective. Myth, lessons
and a new model. Economic Modelling, 52, pp.101-107.
Bodea, C. and Hicks, R., 2015. Price stability and central bank independence: Discipline,
credibility, and democratic institutions. International Organization, 69(1), pp.35-61.
Bodea, C. and Higashijima, M., 2017. Central Bank Independence and Fiscal Policy: Can the
Central Bank Restrain Deficit Spending?. British Journal of Political Science, 47(1), pp.47-
70.
Bodea, C. and Higashijima, M., 2017. Central Bank Independence and Fiscal Policy: Can the
Central Bank Restrain Deficit Spending?. British Journal of Political Science, 47(1), pp.47-
70.
Bodenstein, M., Erceg, C.J. and Guerrieri, L., 2017. The effects of foreign shocks when
interest rates are at zero. Canadian Journal of Economics/Revue
canadienned'économique, 50(3), pp.660-684.
De Haan, J. and Eijffinger, S.C., 2016. The politics of central bank independence. (De Haan
and Eijffinger 2016)
Doumpos, M., Gaganis, C. and Pasiouras, F., 2015. Central bank independence, financial
supervision structure and bank soundness: An empirical analysis around the crisis. Journal of
Banking & Finance, 61, pp.S69-S83.
Edwards, S., 2015. Monetary policy independence under flexible exchange rates: an
illusion?. The World Economy, 38(5), pp.773-787.
Fernández-Albertos, J., 2015. The politics of Central Bank independence. Annual Review of
Political Science, 18, pp.217-237.