chapter  5
Central bank independence in a MENA transition economy
The experience of Algeria
ByAbdallah Zouache, Mohamed-Cherif Ilmane
Pages 21

The paradigm of time inconsistency (Kydland and Prescott, 1977) applied to the problem of monetary policy by Barro and Gordon (1983a) established the possibil­ ity of an inflationary bias. Devices have therefore been suggested in the literature to reduce this bias. Barro and Gordon (1983b) conclude that the best solution for the time-inconsistency problem consists of the introduction of fixed rules in monetary policy, that is, the authorities commit themselves to certain policy rules. Following the pioneering work by Rogoff (1985), the delegation of monetary policy making powers to independent central banks has been widely believed to bring about lower inflation. Since then, a number of studies have provided empirical support for this negative relationship between central bank independence and inflation for various samples of developed economies (Alesina and Summers, 1993). However, empirical evidence from developing countries has been less clear-cut (Fuhrer, 1997). Furthermore, there are few studies of the independence of the central banks of Middle East and North African (MENA) countries, and especially of the independence of the Bank of Algeria.