The ultimate determinants of central bank independence

15

bank independence - will hardly change in the same period. The stickiness of actual (legal)
central bank independence results from the fact that central bank laws are very occasional-
ly adjusted in practice, especially in the industrial countries during the post-war period.⁹⁾
Moreover, it could be questioned whether the legal indices of central bank independence
are a good measure of actual central bank independence (See also: Eijffinger and De
Haan, 1995).

IV.1.The data

As proxies for the ultimate determinants of central bank independence, we have chosen the
following economic and political variables (See for a detailed account of these variables:
Appendix C). For the natural rate of unemployment, the non-accelerating inflation rate of
unemployment (NAIRU) is taken from Layard, Nickell and Jackman (1991). They
estimated the NAIRU for nineteen industrial countries in the period 1960-1988. The proxy
for society’s preferences for unemployment stabilization relative to inflation stabilization is
the number of years that a left-wing (socialist) party has been in government as a share of
the total number of years (WLEFT). For, a left-wing government has a higher preference
for unemployment stabilization and, thereby, the optimal degree of central bank indepen-
dence increases under a left-wing government. The variance of productivity shocks is
proxied by the variance of output growth (GDP) on an annual basis (VPROD). We
compute the slope of the Phillips curve, using labour’s income share in GDP.¹⁰⁾ Because
data for labour’s income share are not available for all countries in our sample, we have
taken the ratio between the compensation of employees paid by resident producers to
resident households and GDP (SLOPE).

Therefore, the optimal degree of central bank independence (OPCBI) is explained by the
following variables, taken in deviation from their mean (M)

(+)                       (+)                    (-)

OPCBI = a₁ ∙ [NAIRU_M] + a₂ ∙ [WLEFT_M] + a₃ ∙ [VPROD_M] +

(+)

a₄ ∙ [SLOPE_M]                                                               (4.1)

⁹⁾ Very recently, some countries within the European Union - e.g. France and Spain - have made their
central banks more independent from government because this is required by the Maastricht Treaty on
Economic and Monetary Union. These changes of central bank laws are, however, too infrequent to be
applicable for our empirical analysis of the determinants in the industrial countries.

¹⁰⁾ Since we use a Cobb-Douglas production function (equation (2.1)), the production elasticity of labour, β,
equals labour’s income share in GDP.

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