[Publisher:] Institut für Weltwirtschaft (IfW) [Place:] Kiel [Year:] 1995
Kiel Working Paper 710
A theoretical model is developed to describe the behavior of dependent and independent central banks. In an empirical test, the reaction functions of six central banks of industrial countries with different degrees of independence are estimated using an error correction framework. In shock simulations the reactions to an increase in inflation and a decrease in capacity utilization are compared. Contrary to the predictions of the theoretical model, there appears to be a difference only in response to a rise in inflation; there is no systematic difference, however, in the policy of dependent and independent banks following a decline in capacity utilization.