CENTRAL BANK INDEPENDENCE - ONLY PART OF THE INFLATION STORY

The idea that countries with an independent central bank perform bette r on price stability is very popular and confirmed by studies investig ating the issue empirically. Yet, using the Barro-Gordon model we show that the gains from a more independent central bank are not fixed. Th ey are larger in countries with unstable governments, not committed to fixed exchange rates, and in countries were left-wing parties hold a strong position. The effect of increasing central bank independence is also shown to depend on the level of the natural unemployment rate an d the slope of the short-term Phillips curve.