On the Long and Short of Central Bank Independence, Policy Coordination, and Economic Performance

Author/Editor:

Alberto Musalem Borrero

Publication Date:

February 1, 2001

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the implications of central bank independence for equilibrium macroeconomic performance. The focus is on institutional arrangements governing financial relationships between central banks and ministries of finance, in the presence of competing objectives and constraints across institutions. Abstracting from long-run considerations, higher central bank independence increases fiscal discipline and results in lower inflation and growth, generating a short-run institutional Phillips curve. In the presence of sufficiently strong negative long-run externalities of inflation onto growth, higher CBI also increases fiscal discipline and generates lower inflation, however, it also yields higher growth and generates an inverted institutional Phillips curve. Strikingly, higher central bank independence is found to be frequently sub-optimal for a wide set of stylized economies. Whether these economies are empirically relevant is an open question.

Series:

Working Paper No. 01/19

Subject:

English

Publication Date:

February 1, 2001

ISBN/ISSN:

9781451843743/1018-5941

Stock No:

WPIEA0192001

Format:

Paper

Pages:

25

Please address any questions about this title to publications@imf.org