Daron Acemoğlu, Simon Johnson, James Robinson, Pablo Querubin, 25 June 2008

Central bank independence can have marvellous effects on inflation, but not always. This column reviews evidence of a U-shaped interaction between policy reform and general political institutions; independence can be undermined in nations with poor political institutions, while it is less necessary in nations with excellent institutions. A ‘seesaw’ effect is also identified whereby fiscal policy deteriorates following central bank independence.

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