Assessing the influence of central bank independence on inflation volatility: a case study of WAEMU

Abstract

Despite extensive research on the factors influencing inflation dynamics, few studies have focused on the specific channels through which central bank independence impacts inflation volatility, especially in low-income monetary unions. This gap is particularly noticeable in the WAEMU region, where member countries share a common monetary authority but experience diverse macroeconomic and political shocks. Understanding how different aspects of independence function within this unique institutional setting is, therefore, vital for shaping effective policies. Based on this context, this article empirically investigates the effect of central bank independence on inflation volatility. Using an Instrumental Variables Two-Stage Least Squares (IV-2SLS), and Smoothed Instrumental Variable Quantile Regression (IVQR) approach from 2006 to 2023, the findings show that greater central bank independence is correlated with lower inflation volatility. Among various independence dimensions, governor and board autonomy, financial independence, monetary policy, conflict-resolution mechanisms, and restrictions on central bank lending to the government stand out as the most significant in reducing inflation volatility. In addition, we have highlighted that CBI plays a vital stabilising role in high-volatility regimes. Countries experiencing more turbulent inflation benefit more from having an independent monetary authority. These results suggest that strengthening these specific dimensions is essential for improving price stability in WAEMU economies.