The ultimate determinants of central bank independence



20

(ii) Θγ is diagonal, which implies that the correlation between the observed legal indices
of central bank independence (y) is
only caused by the latent optimal degree
(
η).16)

IV.3.The empirical results

On the basis of the restrictions given in the former section, LISREL computes Full
Information Maximum Likelihood
estimates of the parameters of the model. Computation
with LISREL renders two different kind of estimations. First, the relationship between the
optimal degree of central bank independence (η, here renamed as OPCBI) and the
explanatory variables (NAIRU_M, WLEFT_M, VPROD_M and SLOPE_M), reflecting the
ultimate
determinants of central bank independence, is estimated.17) Second, by estima-
ting this relationship and calculating the optimal degree of central bank independence for
each country (OPCBI), the comparison between the
optimal degree and the legal indices
of central bank independence (AL, GMTT, ES and LVAU) can be made. Such a compari-
son is only possible if both the optimal degree and the legal indices are
normalized on
their theoretical scale (OPCBI_N, AL_N, GMTT_N and ES_N, respectively).18)
Next to the differences of individual legal indices with the optimal degree, the
average
difference
(AvDIFF) may be calculated in the following way:

A DIFF [ΑLN] + [GMTT-N] + [ESN] + LVAU [OPCBI N

(4.10)


This average difference is positive, if the average of legal indices exceeds the optimal
degree, and
negative, if the optimal degree exceeds the average of legal indices.

A positive average difference indicates that the legal degree of central bank independence
should be
decreased, whereas a negative average difference that the legal degree should be
increased in order to bring it closer to the optimal degree based on the ultimate determi-
nants of central bank independence.

Table 4.1 shows the estimation results, with all restrictions imposed in the former section,
for the sample period 1960-1993 (for NAIRU, the sample period 1960-1988).

16) The measurement errors (γ) in equation (4.3) are, thereby, uncorrelated.

17) Because all variables are measured in deviation form their mean and have, thus, zero expectations, the
constant is eliminated from the model.

18) Note that the legal index of Cukierman (LVAU) is already normalized on its theoretical scale, i.e. in
theory its lowest value is 0 and its highest value 1.



More intriguing information

1. Strategic monetary policy in a monetary union with non-atomistic wage setters
2. An alternative way to model merit good arguments
3. The Effects of Reforming the Chinese Dual-Track Price System
4. Improving Business Cycle Forecasts’ Accuracy - What Can We Learn from Past Errors?
5. Skills, Partnerships and Tenancy in Sri Lankan Rice Farms
6. The Clustering of Financial Services in London*
7. Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules
8. Sustainability of economic development and governance patterns in water management - an overview on the reorganisation of public utilities in Campania, Italy, under EU Framework Directive in the field of water policy (2000/60/CE)
9. An Intertemporal Benchmark Model for Turkey’s Current Account
10. SOME ISSUES CONCERNING SPECIFICATION AND INTERPRETATION OF OUTDOOR RECREATION DEMAND MODELS
11. The Works of the Right Honourable Edmund Burke
12. Innovation in commercialization of pelagic fish: the example of "Srdela Snack" Franchise
13. Behavioural Characteristics and Financial Distress
14. Detecting Multiple Breaks in Financial Market Volatility Dynamics
15. Migrant Business Networks and FDI
16. Public-Private Partnerships in Urban Development in the United States
17. AGRICULTURAL TRADE IN THE URUGUAY ROUND: INTO FINAL BATTLE
18. The name is absent
19. Who runs the IFIs?
20. The name is absent