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THE ANALYSIS OF SIGNIFICANCE OF CENTRAL BANK INDEPENDENCE
Abstract
The aim of this paper is to evaluate the significance of central bank independence, based on the hypothesis that the rate of inflation decreases as the independence of the central bank increases. The paper is based on current scientific research in the field of measuring and evaluating central bank independence. Subsequently, the CBI index (Central Bank Independence Index) was designed. It is based on the most important criteria for central bank independence and the determination of their values. Then, using the proposed CBI index, the independence of selected central banks was measured. CBI values were compared with the average rate of inflation in those countries from 1999–2014. The calculated results do not prove the hypothesis; however, it can be concluded that central banks with a higher rate of independence tend to achieve an inflation target of around 2\%, which is currently the target of most central banks in market economies. Our results do not correspond to the results of previous studies, which were conducted when it was believed that a higher rate of central bank independence meant a lower rate of inflation. This is possible to explain by the fact that nowadays central banks do not aim to reduce the rate of inflation, as in the past, but to hold it around the inflation target, which is usually around 2\%. Of course, it is necessary to consider that, in reality, there are a number of factors having an influence on inflation rate that a central bank cannot control. The importance of central bank independence lies mainly in the fact that elected politicians are watching primarily to achieve short-term objectives. They can try to influence the central bank to act in a way that leads to the support of economic growth in the short term, though the effect would cause unwanted inflation over the long term.
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