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From Table 4.2, it is clear that the t-values of all explanatory variables, except SLOPE,
improve considerably. One of these explanatory variables (VPROD) becomes even
significant at a 90% confidence level. All explanatory variables, except NAIRU, have the
expected sign. If we compare the coefficients of the explanatory variables in this table
with those in Table 4.1, the estimated coefficients do not seem very robust.
Therefore, we have also calculated the optimal degree of central bank independence and
the average difference with the legal indices for each country. The positive average
differences for Germany and Switzerland appear to be still in place, while Japan and New
Zealand join this group too. The negative average differences for Australia, Norway,
Sweden and the United Kingdom still remain, although these differences become generally
bigger. Now this group is, however, joined by Finland, France and Italy (negative average
difference is -0.20 or lower). Almost no average differences are found for countries, like
Denmark, Ireland, the Netherlands and the United States. Apparently, these countries have
central bank laws which correspond with their optimal degree based on the ultimate
determinants, in sofar as they are captured in our empirical model.
V. CONCLUSION
What may be concluded from the previous sections?
First, it is possible to derive propositions on the basis of our theoretical model which
formulates the relationship between the optimal degree of central bank independence and
four ultimate determinants in a country, namely the natural rate of employment, the
society’s preferences for unemployment stabilization relative to inflation stabilization, the
variance of productivity shocks, and the slope of the Phillips curve. These determinants,
reflecting the economic and political structure of a country, refer only indirectly to the
actual (legal) degree of central bank independence.
Second, to distinguish between the optimal and actual (legal) degree of central bank
independence the latent variables method (LISREL) appears to be very fruitful as an
empirical model. Not only enables this method us to explain the optimal degree by proxies
for the ultimate determinants (NAIRU, WLEFT, VPROD and SLOPE), but also to
compare the optimal degree with the legal indices of central bank independence (AL,
GMTT, ES and LVAU). The latent variables method, based on nineteen industrial
countries, for the sample period 1960-1993 (for NAIRU: 1960-1988) leads to estimations
which support our theoretical model reasonably, if we relax two restrictions on the
covariances.
Third, the comparison between the optimal degree and the legal indices of central bank
independence renders some interesting results. Some countries - like Germany and
Switzerland - seem to have a suboptimally high degree of central bank independence,
whereas other - such as Australia, Norway, Sweden and the United Kingdom - appear to