Central Bank Independence, Financial Instability and Politics: New Evidence for OECD and Non-OECD Countries

This paper analyses the determinants of a new index of central bank independence, recently provided by Dincer and Eichengreen (2014), using a large database of economic, political and institutional variables. Our sample includes data for 31 OECD and 49 non-OECD economies and covers the period 1998-2010. To this aim, we implement factorial and regression analysis to synthesize information and overcome limitations such as omitted variables, multicollinearity and overfitting. The results confirm the role of the IMF loans program to guide all the economies in their choice of more independent central banks. Financial instability, recession and low inflation work in the opposite direction with governments relying extensively on central bank money to finance public expenditure and central banks’ political and operational autonomy is inevitably undermined. Finally, only for non-OECD economies, the degree of central bank independence responds to various measures of strength of political institutions and party political instability.