Effects of Central Bank Independence in Developing Countries

This thesis is composed of three empirical studies on the effect of central bank independence in developing countries. The first empirical study in Chapter 2 investigates the relationship between CBI and inflation in developing countries. After estimating a panel regression model, using pooled least square on the assumption of coefficient homogeneity; the result reveals that there is no significant negative relationship between CBI and inflation. The poolability of the panel is checked by applying the Chow test and Roy-Zellner test. The results show that the model is not poolable. Furthermore, by performing a panel heterogeneity model with pooled mean group (PMG) estimator and show that there exists a reverse relationship between CBI and inflation. Chapter 3 presents the responses to financial asset prices, consumption and investment in relation to CBI shocks in developing countries. The financial asset prices are divided into three categories: exchange rate, stock index and bond yield. The analysis is based on a panel Vector Autoregressive (Panel VAR) estimation. By applying poolability tests, heterogeneity across the countries in our sample is identified. One possible solution to this problem is to apply a mean-group estimation to the panel VAR. Additionally, the sample countries are divided to make the sub-group poolable. Chapter 4 examines whether CBI and macroprudential policy can contribute to enhancing financial stability in terms of credit per GDP. This chapter proposes a new index concerning macroprudential policy for 20 developing economies over the period 2000 to 2017. This chapter shows that the effect of CBI and macroprudential policy on credit per GDP depends on the non-linearity of the CBI degree. The more independent the central bank, the more stable its financial system, with a stronger effect when CBI is below its trend. When the sample is separated into two groups based on the poolability test, the result reveals that countries with a higher average CBI index maintain better financial stability.