What really matters: conservativeness or independence?

Abstract

Contemporary views often support the idea that a high level of central bank independence, together with a clear mandate for it to restrain inflation, are important institutional devices for maintaining price stability. The meaning and policy implications of central bank independence are discussed. Two indicators of central bank independence are tested, and it is shown that 'instrument independence' (the freedom of a central bank to choose its policy means) is important for inflation performance, but other aspects of central bank independence and 'conservativeness' have little or no impact on inflation. JEL Codes: E58, G20