INSTITUTIONAL BARRIERS TO THE ANTI-INFLATION EFFICIENCY OF INDEPENDENT CENTRAL BANKS: A POLITICAL-ECONOMIC ANALYSIS

Abstract

The paper reviews institutional factors of independent central banks success. This problem is rooted in cases when fractionalized societies and societies with weak institutions adopt autonomy of central banks mostly legally. It is highlighted that lack of rule of law and fractionalization of society may be viewed as competitive hypotheses to explain why actual independence deviates from legal one. The paper establishes that increase in the level of central banks independence without political support for independent monetary policy is possible only if institutional quality reaches the necessary threshold that is sufficient for activating structural reforms but insufficient for ensuring that there is no influence on the policy from the side of different institutional distortions. It is found that political regime, rule of law and structure of society constitute more complicated institutional framework for independence of monetary institutions. Due to this, the main question is whether the central bank is included in the limits of oligarchical consensus or not. If yes, then the rule of law does not matter for acquiring legal independent status. If no, then the rule of law is the core requirement for actual independence. Moreover, the rule of law in most cases may compensate the problem of structural heterogeneity of the society.