The ultimate determinants of central bank independence



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

χ1       1

L 1
ξ
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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