Inflation targeting and central bank independence: Do legal origins play a role?

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Type of the article: Research ArticleAbstractCentral bank independence is widely recognized as a precondition for launching inflation targeting, but there is no empirical support for this. While actual independence of monetary institutions is key for the effective implementation of this monetary regime, formal reforms have been implemented extremely unevenly both over time and across countries. Legal origins may affect different institutional paths of central bank independence strengthening during the adoption of inflation targeting across countries. Applying a t-test, panel regression, and difference-in-difference based event-study analysis, we show a strong statistically significant distance between levels of central bank independence across Common Law and Civil Law countries with inflation targeting. Civil Law countries perform with higher central bank independence; they are more likely to strengthen it before inflation targeting launch and continue to reform the central bank’s legislation toward greater autonomy after the introduction of this monetary regime. These results confirm that Legal origins matter for central bank independence. More formally oriented Civil Law coexists with relevant legislation changes. While less formally oriented Common Law may not require changes in legislation to implement a monetary regime grounded on central bank independence, in essence. Such results help explain weak empirical arguments for strengthening central bank independence as a precondition for inflation targeting, given the structural heterogeneity of countries determined by legal tradition.

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