The strength of central bank and its impact on price stability in south Asia

Abstract

Central bank plays a key role in an economy of a country in terms of conducting monetary policy. But the importance of maintaining an adequate level of financial strength for a central bank is subjected to controversy believing that being the monetary authority in the economy, central banks do not require financial strength. But recently, the importance of financial strength even for central banks came to the consideration in the event of financial failures of central banks in larger economies. Hence, the requisite of central bank financial strength in terms of achieving policy objectives particularly the price stability which is the key policy objective of majority of central banks around the world came to discussion. The purpose of this study is to examine the impact of central bank financial strength on price stability in South Asian context. Prevailing limited studies on this field have been focused on the analysis of central bank financial strength and price stability mostly in the context of western countries or as a whole for the world. Investigation on South Asian context would give different insight to the prevailing debate on the topic since it is considered that there is a lower central bank independence within the South Asian region which motivated this study. The study has been conducted for the time period of 1980 to 2015 and an unbalanced panel regression was conducted using central bank financial strength as the main independent variable where the consumer inflation as a proxy to price stability was the dependent variable. Empirical result of this study provides a significant negative relationship between central bank financial strength and inflation suggesting a probable impact from central bank financial strength on price stability for the selected countries within the region.