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  • Print publication year: 2010
  • Online publication date: December 2010

11 - Institutional Rules and the Conduct of Monetary Policy: Does a Central Bank Need Governing Principles?



This chapter suggests that good governance should enhance the trustworthiness of a central bank. Trust is determined by the performance of a central bank over time and is estimated by the absolute value of accumulated inflation surprises. The latter is estimated for a cross-section of over 100 countries. The empirical evidence reveals that all principles of good governance matter, and that no single indicator of central bank behavior, such as its autonomy, suffices to explain inflation performance. Moreover, there is no unique combination of good governance principles that works for every single country. Institutional and socioeconomic differences across countries mean that one size does not fit all.


As the 1990s began, the movement to grant either de facto or de jure central bank autonomy gathered speed, prompted in part by the view that there was a correlation but not, as it turns out, causation between inflation and central bank independence. There was an even weaker relationship between real economic growth and central bank independence (Alesina and Summer 1993; Forder 2005). Figure 11.1 plots the relationship between average inflation for the years 1990–2004 in over 100 countries against an index of central bank autonomy that is comparable, though not identical, to the many indicators that have been published over the past several years (e.g., see Cukierman 1992; Siklos 2002, Chapter 6 and references therein). No clearly identifiable negative relationship between these two variables is apparent.