The effect of monetary freedom on the inflation level in extended time period: the case of low and middle income countries

Abstract

There are a number of determinants of inflation rate. Initially, the major attention was paid to money supply as the main determinant of the inflation rate. Over the last two decades different researches claim that another major determinant of inflation is Monetary Freedom of Central Banks (CB) which is measured by CB Independence (CBI) index. This research project is aimed in revealing the link between the CBI and the rate of inflation in the case of low and middle income countries. Also, the empirical analysis on the influence of institutional quality on the connection between CBI and inflation was held. The paper also prospered in solving the reverse causality problem with assistance of instrumental variable.