№ 3/2019

Fìnansi Ukr. 2019 (3): 7–21https://doi.org/10.33763/finukr2019.03.007

MONETARY POLICY

KOZIUK Viktor ¹

¹West Ukrainian National University
OrcID ID : https://orcid.org/0000-0002-5715-2983

Іndependence of central banks and inflation: fragmentization of society vs the right of law

Central banks independence in most cases works as anti-inflationary tool. But some times even in the case of high autonomy of monetary authority inflation may persist. In this paper co-existence of formally independent central banks with high inflation is analyzed with rely on vision that rule of law drives institutional quality as well as society fractionalization drives macroeconomic and social instability. The purpose of the paper is to investigate the contribution of such institutional features to anti-inflationary inefficiency of independent central banks. Having the example of 150 countries it is shown that inflation is still in opposite relation with central bank independence, rule of law is strictly counter-inflationary, and variables of society’s structure are less statistically robust as inflation’s drivers. Countries grouping shows that less successful independent central banks are associated with highly fractionalized societies, that are democracies with some resource endowment. In the same time, rule of law also vary across the countries demonstrating that weak democracies can’t achieve high rule of law to protect independence of central banks even then such democracies are ready to grand it to them. Logit regression demonstrates that only rule of law variable statistically robust in determining probability of higher inflation and central bank independence co-existence. Society fractionalization proxies are not statistically significant as the predictors of probability that independent central banks can’t maintain lower inflation. But the structure of society shouldn’t be negligible in explaining why independent central banks may lack of successes. The more complicated modalities of relations between structure of society, institutional quality and political demand on price stability policy are exists. In the case of fractionalized society elites may reach consensus about redistributional policy yet the explicit doctrines of fragmented government. Central banks that are inside the perimeter of such consensus are not sensitive to rule of law. While central banks that outside such consensus depend on it much.

Keywords:central banks independence, inflation, monetary policy, fractionalization of society, rule of law, institutional quality

JEL: E58, E59, O23, Q33

KOZIUK V. . Іndependence of central banks and inflation: fragmentization of society vs the right of law / V. . KOZIUK // Фінанси України. - 2019. - № 3. - C. 7-21.

Article original in Ukrainian (pp. 7 - 21)

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