18
also zero expectations.
Therefore, y is a vector of observed legal indices of central bank independence (AL,
GMTT, ES and LVAU), measured in deviation from their means
AL M
GMTT M
(4.5)
ESM
LVAU M
, and x is a vector of observed explanatory variables, being the non-accelerating inflation
rate of unemployment (NAIRU), the percentage of years of a left-wing government
(WLEFT), the variance of output growth (VPROD) and the compensation of employees as
share of GDP (SLOPE), measured in deviation from their means
NAIRU M
WLEFT M
(4.6)
VPROD M
SLOPE M
So, equations (4.3) and (4.4) become, respectively
AL M
GMTT M
ESM
LVAU M
(4.3’)
and
|
NAIRU M |
[λχ1 1 |
L 1 |
lδ 1 | |||
|
WLEFT M |
λx2 |
ξ2 |
δ 2 | |||
|
VPROD M |
= |
λx3 |
■ |
ξ3 |
+ |
δ 3 |
|
SLOPE M |
L '- |
ξ 4J |
δ L 4 J | |||
(4.4’)
Furthermore, Φ and Ψ are defined as the covariance matrix of ξ and the variance of ζ,
respectively, and Θγ and Θδ as the true variance-covariance matrices of γ and δ, respecti-
vely. Then it follows from the above assumptions that the variance-covariance matrix Σ of
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