Inflation and central bank independence: Conventional wisdom redux

Until recently there existed a broad consensus that an important institution for combating inflation is a central bank insulated from political influence. This conventional wisdom has been challenged by, among others, Campillo and Miron (1997), who present evidence purporting to show that if an inflation regression equation is expanded to include not only their proxy fur central bank independence (CBI) but other regressors as well, then the negative correlation between inflation and CBI vanishes. The present paper argues that allegations of the demise of this nexus should not be accepted uncritically. This paper, which reports the results of an analysis of covariance structures, finds a strong negative relationship between inflation and CBI.