The impact of institutional arrangements on inflation : a study of 18 OECD countries, 1959-1990

Abstract

We investigate the influence of institutional arrangements on inflation in 18 OECD countries. The factors considered are, on the hand institutional constraints on monetary policy such as the independence of the Central Bank and commitment to fixed exchange rates and on the other political factors such as ideological and re-election motives. We find that an independent Central Bank has a disinflationary effect, whereas fixed exchange rates have no influence. Above a threshold value, the independence of the Central Bank becomes effective. The ideological colour of the government is measured by a new proxy that is more precise than those used in related studies. The use of this proxy changes the results significantly