Scientific journal paper Q2
Uncovering the (possible) relationship between Central Bank Independence and economic growth in the context of monetary unions
Luís Martins (Martins, L. F.); Luís Clemente-Casinhas (Clemente-Casinhas, L.); Alexandra Ferreira-Lopes (Ferreira-Lopes, A.);
Journal Title
CESifo Economic Studies
Year (definitive publication)
N/A
Language
English
Country
United Kingdom
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Abstract
This work estimates the relationship between Central Bank Independence (CBI) and economic growth in the context of monetary unions, using dynamic panel models. We use two measures of CBI: the Legal CBI index and the irregular turnover rate. When an irregular turnover of the Central Bank Governor occurs, it harms growth for countries outside monetary unions. On the contrary, the Legal CBI index is a positive factor for growth, although only regarding countries belonging to monetary unions. The limitations on lending to the government is the most important component of the Legal CBI, which explains this result. Additionally, we analyse sub-samples taking into account the level of income, the number of crises, the existence of quantitative easing policies, and different time windows. Interestingly, 1990–2013 was a harmful period for growth for the entire sample but benign for countries that belong to monetary unions. Moreover, when countries are in a crisis they benefit from being a member of a monetary union with an independent central bank. Results seem to point to the conclusion that Legal CBI in a monetary union has the potential to increase economic growth rates.
Acknowledgements
The authors thank Sérgio Lagoa, the editor, and an anonymous referee for helpful comments. They also acknowledge financial support from the Portuguese National Science Foundation (FCT) through grant UIDB/00315/2020.
Keywords
Central Bank Independence,Dynamic panel models,Economic growth,Monetary unions
  • Economics and Business - Social Sciences
Funding Records
Funding Reference Funding Entity
UIDB/00315/2020 Fundação para a Ciência e a Tecnologia