Three essays on central banking.

Summary This thesis consists of three empirical papers on central bank institutional design.Chapter 1 contributes to the debate on the importance of central bank independence (CBI) in lowering inflation rates. It stresses the relevance of employing indices of central bank independence computed dynamically in two ways. First, it recomputes the evolution of the Grilli et al. (1991) index of CBI and shows that the timing of large legislative reforms is closely related to inflation rate dynamics. Using unit root tests with endogenous structural breaks, I find that reforms that modify the degree of CBI represent structural breaks in the inflation rate dynamics. Second, employing the dynamic Grilli et al. (1991) index of independence confirms the negative relationship between CBI and inflation in a sample of 10 advanced economies.Chapter 2 presents a new and comprehensive database of central bank institutional design for 65 countries over the period 1972--2014. This chapter describes in detail the sources of information and the coding rules used to create a new index of central bank independence. It also compares this new index with the classical measures of CBI and highlights the new aspects of central bank institutional design included in this database such as financial independence and accountability. An important innovation of this new index is its dynamic nature. This enables an investigation of the endogenous determination of the level of independence of central banks and suggests several instruments for the CBI index. Using an instrumental variable approach, this chapter provides strong support for a causal, negative CBI-inflation nexus.Chapter 3 uses a political economy framework to investigate the drivers of reforms in central bank institutional design. Using the new CBI index developed in Chapter 2, this Chapter investigates the determinants of central bank reforms in a sample of 65 countries over the period 1972--2014. The results obtained suggest that the incentives generated by initial reforms which increased the level of independence, as well as a regional convergence, represent important drivers of reforms in central bank design. At the same time, an external pressure to reform, such as obtaining an IMF loan or joining a monetary union, also increases the likelihood of reforms, while government changes or crises episodes have little impact.