ABSTRACT
Politically independent central banks, it is argued, will be less likely to give in to pressures to adopt expansionary monetary policies for political purposes, and, therefore, will be able to deliver lower average inflation. The usual reason cited to explain the correlation between independent central banks and lower average inflation is that independent central banks are often viewed as more concerned with achieving and maintaining low inflation than politicians are. Most research has focused on two dimensions of central bank independence. One, usually called political independence, represents the degree to which a country’s central bank has policy objectives that are insulated from political pressures to expand aggregate demand rapidly. The second dimension of independence, called economic independence, is the degree to which the central bank is free to use its policy instruments to pursue its objectives. Inflation imposes significant costs on an economy, particularly by causing arbitrary wealth redistributions and heightened economic uncertainty.
