Central Bank Independence:The Key to Price Stability?

ISSN 0428-1276 Low inflation over long periods is the sign of an effective central bank. The authors suggest that a large fraction of the worldwide decline in inflation since the early 1980s results from an international movement toward more independent central banks. Industrialized nations have achieved a remarkable decline in inflation: Their average annual rate tumbled from 5.6% in the 1955–88 period to 2.7% in 1988–2000 (see figure 1). One of the most extraordinary success stories is New Zealand, whose average annual inflation plummeted from 7.6% in the earlier period to 2.7% in the later one. Many commentators have attributed this improvement to inflation targeting, which New Zealand instituted in 1989, but it would be premature to credit inflation targeting alone.