Reconsidering the Relationship between CBI and FIX

Bearce, David H. and Garriga, Ana Carolina (2025): Reconsidering the Relationship between CBI and FIX.

Abstract

This research note reconsiders the question of whether central bank independence (CBI) and fixed exchange rates (FIX) function as substitutes or complements. We argue that these monetary institutions have neither served as substitutes nor performed as complements for either inflation control or exchange rate stability. In terms of their substitutability, our statistical evidence shows that while CBI has been used for inflation control, FIX has been more directed towards exchange rate stability using updated datasets with these monetary institutions measured both on a de jure and de facto basis with nearly global country/year coverage from 1970 to 2020. In terms of their complementarity, our results also demonstrate that CBI was not more effective at reducing inflation when paired with greater FIX and FIX was not more effective at promoting exchange rate stability when paired with greater CBI. If anything, both are less effective when paired with the other monetary institution. These results suggest a “third generation” framework for studying CBI and FIX together with a focus on macroeconomic objectives beyond just domestic price stability.

• Item Type: MPRA Paper
• Language: English
• Keywords: central banks; central bank independence; exchange rate regimes; inflation; exchange rate stability
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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