Central bank independence: Only part of the inflation story

Summary Central bank independence: Only part of the inflation story The idea that countries with an independent central bank perform better on price stability is very popular and confirmed by studies investigating the issue empirically. Yet, using the Barro-Gordon model we show that the gains from a more independent central bank are not fixed. They are larger in countries with unstable governments, not committed to fixed exchange rates, and in countries were left-wing parties hold a strong position. The effect of increasing central bank independence is also shown to depend on the level of the natural unemployment rate and the slope of the short-term Phillips curve.We are grateful to Eric Pentecost and two referees of this journal for valuable comments on an earlier version of the paper. Any remaining errors are ours.