1. Introduction
Nowadays it is widely believed that a high level of central bank independence (CBI) coupled with some
explicit mandate for the bank to restrain inflation are important institutional devices to assure price
stability. The evidence in support of this view generally consists of cross-country regressions using
proxies for CBI which are generally based on the statutes of the central bank (see Eijffinger and De Haan,
1996 and Berger et al., 2001 for surveys). Popular as the view referred to above may be, the empirical
literature on the effects of central bank independence recently came under attack.
Firstly, the relevance of independence measures which are based on regulations on the position
of the central bank is disputed if it comes to testing whether CBI is conducive to lower inflation (see e.g.
Forder, 1996). Indeed, legal indices of central bank independence are often incomplete and noisy
indicators of actual independence as laws cannot specify explicitly the limits of authority between central
banks and the political authorities under all contingencies. And even when the laws are quite explicit,
actual practice may deviate from them. Cukierman (1992) argues that legal independence measures may
be a better proxy for actual independence in industrial countries than in developing countries. As an
alternative, Cukierman (1992) and Cukierman et al. (1992) therefore developed a yardstick for central
bank autonomy, which is not based on central bank laws but on the actual average term of office of the
central bank governor. This indicator is based on the presumption that, at least above some threshold, a
higher turnover of central bank governors indicates a lower level of independence. So far, quite a few
studies have used this turnover rate of central bank governors (TOR) as indicator for CBI and conclude
that there is a clear relationship between the TOR and the inflation performance of developing countries.
One drawback of this literature is that almost all studies are based on the data provided by Cukierman
(1992) and Cukierman et al. (1992) as this was the only data set available.1
Secondly, various authors have questioned whether CBI really matters, once other variables that
may influence inflation are taken into account. For instance, using data for developing countries
Campillo and Miron (1997) conclude that CBI plays no role in determining inflation outcomes, once
other factors are held constant. They find that instead openness, political instability and proxies for
government policy distortions are robustly related to inflation. 2 This conclusion may be criticised, as
Campillo and Miron (1997) employ a legal indicator for CBI, which most previous studies have found to
be unreliable for developing countries.
Thirdly, a few studies have sounded a warning that conclusions on the relationship between CBI
and inflation are highly sensitive to influential observations. For instance, Temple (1998) finds that if high
inflation countries are added to his sample of OECD and developing countries, the effect of CBI (proxied
by Cukierman's (1992) legal index) on inflation disappears.
We employ a new data set for the turnover rate of central bank governors, which covers almost
twice as many countries as the Cukierman data set and - in contrast to Cukierman's data set - also covers
the 1990s. We use bivariate and multivariate cross-country models for inflation. We find that once