Central Bank Independence as a Fiscal Commitment to Price Stability

This dissertation examines Central Bank Independence from the perspective of the Fiscal Theory of the Price Level, an expansion of Monetarism which emphasizes inflationary consequences of unsustainable public finances. Outsourcing monetary policy to a technocratic institution free of political considerations is thereby understood as a fiscal commitment to price stability, but not a guarantee thereof as it can still be undermined by excessive government spending. By employing a new dataset on legal Central Bank Independence, I estimate its impact on annual inflation with a panel data approach for 190 countries between 1970 and 2020, while also incorporating different measures on Fiscal Sustainability. The existence of fiscal policy rules as well as Monetary Dominance are found to be of dis-inflationary effect, whereas legal Central Bank Independence remains statistically significant throughout. In fact, my findings suggest that operational and political autonomy of the monetary authority is crucial for price stability under almost all circumstances.