Measuring Central Bank Independence and Inflation Targeting in Developed and Developing Countries

In the economic literature we can identify six widely used indices or measures for legal independence: Bade & Parkin (1988); Alesina (1988, 1989); Grilli, Masciandaro & Tabellini (1991); Eijffinger & Schaling (1993); Cukierman (1992) and Cukierman, Webb & Neyapti (1992).All these indices of legal central bank independence exhibit inverse and significant relation with inflation in industrialized countries but not in developing countries. In developing countries, the actual practices and norms in central banking may not replicate the central banking law, contrary to the case of developed countries. Cukierman (1992), Cukierman et al. (1992) and Cukierman and Webb (1995) developed three behaviourally oriented indices for measuring central bank independence in emerging countries. These three indices are: a questionnaire – based index form identifying deviations of the legal position from actual practice, the actual turnover rate of central bank governors and the political vulnerability of central bank governor which are used as proxies for actual independence of central banks, particularly in developing countries. The first section of the paper reveals the most important indices for measuring central bank independence in developed countries and in developing countries. In the second section of the paper I use the new index for central bank independence and inflation targeting for measuring these important aspects in three groups of countries: developed countries, developing countries and less developed countries.