Central Bank Independence and Inflation – Output Variability Tradeoff

Abstract

Global evidences show major swing towards autonomy of central banks, Theory and practice show that autonomous central banks are sufficient to maintain low and stable inflation, not due to political inclinations. Our results suggest that the level of independent and discretionary monetary policy is low, Pakistan’s central bank is not proficient enough to sustain low and stable inflation. In this paper, the central bank independence index is updated up to the year 2021; the monetary authority’s preference parameter is calculated to find gain or loss to the economy caused by the value of central bank independence through inflation-output variability trade-off. In doing so, correlation, OLS Regression, and ADF Unit Root Tests are used to check statistical significance.