Central Bank Independence and Economic Efficiency: Historical Analysis Based on Knowledge Economy

Abstract

The tendency for nations to move toward implementing independent and conservative central bankers has gained momentum over the past two decades. This trend continues despite the fact that the benefits of central bank independence (CBI) are highly contested among economists. The ability of a central bank to boost economic growth has been seriously compromised due to the emergence of the concept, or knowledge, of independent CBI as per the New Zealand model. In this chapter, we will propose a new line of research for the knowledge economy to underscore the ramifications of substituting local, or regional, knowledge by international knowledge. The goal of this chapter is to assess whether the new knowledge has real merits vis-à-vis the old knowledge of central banking. If not, this chapter will issue a caveat to policy makers to be careful in replacing old knowledge by new knowledge – the new does not always mean a better knowledge. In other words, this chapter will highlight the potential dangers of using untested new knowledge and its economic consequences. This chapter contributes to the literature on CBI by introducing analytical methods not previously used in empirical examination of central banks. Analysis has uncovered the presence of high mobility in economic variables that is unexplained by changes in CBI. The chapter addresses the question of mobility by making use of mobility measures and linear regression in an attempt to identify the source of this mobility. The results from the regression are significant to the theory of central bank independence as they imply that consolidation of inflation rates are not reciprocated with consolidation of economic growth, as conventional theory would suggest.

Citation

Gangopadhyay, P. and Glenn, J. (2021), "Central Bank Independence and Economic Efficiency: Historical Analysis Based on Knowledge Economy", Bhattacharyya, R. (Ed.) Comparative Advantage in the Knowledge Economy, Emerald Publishing Limited, Leeds, pp. 25-39. https://doi.org/10.1108/978-1-80071-040-520210003