Central Bank Independence and Price Stability : A case study of the Riksbank and the ECB 1999-2009

• Main Authors: Mohammedsaid, Khaled, Muhanzu, Nice
• Format: Others
• Language: English
• Published: Högskolan i Jönköping, Internationella Handelshögskolan 2009
• Subjects: Swedish inflation; Business and economics; Ekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-9847

Abstract The debate concerning the importance of central bank independence on inflation rates has, for several years been ambiguous. Some economists, among which Nobel Prize Laureates Kydland and Prescott (1977) argue that central bank independence is crucial to the achievement of price-stability. Others, such as Daunfeltd and de Luna (2008) could in their studies not find any substantial arguments in favour of central bank independence as the key, explaining the successful achievement and maintenance of a low and stable inflation goal. In this paper, we use One-Way Analysis of Variance (ANOVA) and Pearson’s correlation test to examine the impact, if any, that central bank independence has on inflation rates. We focus our analysis on a ten year period from 1999 to 2009, looking at the Swedish Central Bank; the Riksbank, and the European Central Bank; the ECB. The empirical analysis revealed no negative correlation between price-stability and central bank independence. In fact, we found with a 99 % confidence interval that the correlation coefficient between these two variables was only 0.12, a rather weak positive relationship. In Sweden and the Euro-zone we discovered that price stability was achieved years before the concerned central banks were officially declared independent. Also, although the world’s most independent central bank, the ECB did not show the lowest inflation rates. These indices suggest that the decisive elements behind a state's low inflation lies beyond the parameters of its central bank. This provides reason to question the belief that institutional reforms granting central banks more independence are necessary for the achievement and upkeep of price-stability. According to previous research and our own analysis on this topic, a true commitment to sound fiscal policy and a strong inflation adverse social attitude appear to be the variables that most strongly determine the outcome of a low inflation goal. Thereby constituting the backbones without which price-stability can neither be achieved nor maintained.