Social Trust and Central-Bank Independence
24 Pages Posted: 24 May 2012
Date Written: May 23, 2012
Central banks have been made more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm that there is such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust levels, the need for central-bank independence is strong enough to dominate the low ability; at high trust levels the ability for reform is high and dominates the low need; at intermediate trust levels there is neither need nor ability strong enough to generate very independent central banks.
Keywords: Trust, Credibility, Reforms, Monetary Policy, Inflation, Central Bank, Time Inconsistency
JEL Classification: E52, E58, P48, Z13
Suggested Citation: Suggested Citation