Central Bank Independence in Transition Economies

The paper discusses recent changes in central bank laws and the relationship between inflation and central bank independence in transition economies. Two indices of legal independence are constructed, covering political and economic aspects of independence. Most of the countries experienced high-inflation episodes in the recent past and changes introduced to the laws after, or simultaneously, with stabilization programmes strengthened the position of the central banks. In further analysis, an inverse relationship emerges between inflation and indices of central bank independence. However, the robust relationship is present only at a high level of economic liberalization. This conclusion is supported by results from regressions on time-aggregated and panel data, even after controlling for the government fiscal position and the absence/presence of an IMF stabilization package.