INDEPENDENCE OF MONETARY POLICY AND ITS EFFECTIVENESS IN TRANSITIONAL HIGHLY INDEBTED ECONOMIES

Abstract

This study analyzes the role of monetary policy independence in promoting price stability in highly indebted emerging economies over the period 2000–2023. The significance of the study lies in the challenges these economies face in managing inflation amid heavy debt burdens and volatile financial environments. The central research question asks whether central bank independence can effectively reduce inflation volatility and foster macroeconomic stability. Accordingly, the study aims to examine the relationship between monetary independence and inflation fluctuations, under the hypothesis of a negative association between the two. To achieve this, panel data for a sample of emerging economies were employed, and the System GMM technique was applied to address endogeneity and serial correlation, using the Garriga (2016) index to measure the degree of monetary independence. The findings indicate that greater independence significantly reduces inflation volatility, though the strength of the effect varies across regions being more pronounced in Latin America and weaker in Sub-Saharan Africa. These results suggest that central bank independence is a fundamental condition for achieving price stability, but not sufficient on its own, as it requires support from complementary fiscal and institutional reforms. The study recommends strengthening central bank frameworks and enhancing policy coordination with fiscal authorities, while future research could extend the analysis by employing quarterly data and incorporating additional factors such as institutional quality and political stability.