The Effect of the Central Bank Independence on Economic Stability

There have been many studies on the effect of the central bank independence and monetary policy on inflation, implying that more independent central banks are more successful in taming inflation. The same theoretical background could be applied to examine the effect of central bank independence on the real sector of the economy. We examine the relationship between the central bank independence and the stability of economic growth by using LVAW index for 43 countries over 1989-2000. Our empirical results show a negative relationship between the central bank independence and deviations of economic growth. Therefore, more independent central banks provide better economic environment for stable economic growth.