National culture and central bank independence : International evidence

Central bank independence is usually determined by institutional developments, and whether culture affects central bank independence is understudied. In this paper, we comprehensively examine the relationship between Hofstede national cultures and central bank independence. We propose several theoretical hypotheses to explain how cultures determine central bank independence and test these hypotheses using an international dataset. We find that two of the five cultural dimensions, namely, individualism and uncertainty avoidance, are significantly related to central bank independence. Central bank independence is higher in collectivistic and uncertainty avoidance countries. We further show that cultural dimensions affect central bank independence in different ways. Individualism and uncertainty avoidance are related to independence in policy formulation and limitation on lending to governments. Although power distance and masculinity are insignificantly related to total central bank independence, power distance is related to independence in objectives and limitation on lending to governments, and masculinity affects independence in policy formulation. Our results are robust to a series of robustness checks