Long Run Inflation: Persistence and Central Bank Independence

Abstract

This paper provides novel evidence of the long-run effects of reforms in central bank independence on inflation. Using instrumental-variable local projections, we show that improvements in central bank independence have a much larger impact on inflation in the long run compared to the short run. Contrary to most of the previous literature, we also find that these long-run effects are larger in developing countries. Our results are robust to alternative local projection designs, including doubly robust and difference-in-differences specifications. Finally, we show that reforms in central design also reduce inflation persistence, reinforcing the effectiveness of monetary policy.