Central Bank Independence and Inflation: the Government debt and Inflation Targeting channel

Abstract

The paper introduces government debt and monetary strategy (Inflation Targeting - IT) into the empirical literature about the relationship between Central Bank Independence (CBI) and inflation. According to Martin’s (2014) model, CBI is not sufficient to maintain price stability in the long run and requires the adoption of IT as a monetary strategy. Using annual data from the period 1998 to 2010 we consider 87 countries (18 considered as developed and 69 as emerging). By using a panel VAR model we explicitly test a possible reciprocal influence between inflation and government debt. At a global level results show an indirect negative effect of Inflation Targeting and CBI on inflation through the government debt channel. A high level of CBI or the choice of IT as a monetary strategy has a significant negative effect on government debt and on inflation.