Central Bank Financial Strength and Inflation: A Meta-Analysis
Several empirical studies have reported that financially weak central banks tend to tolerate systematically higher inflation. If the effect were genuine, central banks would have to pay attention to their capital levels and could not treat them as a residuum. In this note, we take stock of this literature using the statistical techniques of meta-analysis. We collect 176 estimates of the effect of central bank financial strength on inflation and observe that 86% of them are negative, suggesting that low capital levels indeed lead to higher inflation. However, we show that the literature is plagued by publication bias, the preferential reporting of intuitive and significant results. When we correct the literature for this bias, we obtain no evidence for any interplay between central bank financial strength and inflation. The result is robust to employing various meta-regression and nonparametric selection models.
JEL codes: C83, E58
Keywords: Central bank capital, inflation, monetary policy, publication bias, seigniorage
Issued: October 2018
Download: RPN No. 1/2018 (pdf, 266 kB)