Does central bank independence reflect monetary commitment properly?
1. Introduction Without doubt, inflation has a political economy background. Obviously, the policymakers lack instruments for other policy areas such as employment policy or fiscal policy, or face distortions so that objectives in these areas cannot be met without the help of monetary policy. Thus, monetary policy often suffers from the well-known inconsistency problems which create a need for political constraints. Macroeconomic theory shows that monetary policy without commitment has an inherent inflationary bias. If the public becomes aware of the latter it will not trust monetary policy announcements. Credibility of monetary policy then can be regained by commitment. From the point of view of the policymaker, commitment is a means of raising the costs of inflation. One means to generate credibility and, hence, stability is to guarantee central bank independence (CBI). Theoretical considerations based on the literature covering this topic as well as empirical evidence have shown tha
