Research paper about lululemon Example | Topics and Well Written Essays - 500 words - 5

About lululemon - Research Paper Example His early promotional approach was to offer yoga instructors free yoga pants just to get their feedback on the flexibility of the pant. One of the main objectives in Lululemon is the creation of a fun atmosphere and a healthy living at the same time aiming at designing end products that offer high performance, comfort and fit. The company has a market-oriented focus that helps it to offer products that are of high performance, generates customers trust and commitment from the company in supporting the customer. Lululemon price of yoga pants averagely goes for ninety-two dollars. Lululemon is a company that runs with profits. The company worked hard to maintain its level in the market, and its prices earn many profits. According to its website, Lululemon is striving its best to serve its shareholders to the best. An average of seventy percent of the company’s total revenue in business is estimated to come from yoga were selling. What the company aims at is selling and pricing tits products in a way that it earns a profit in the end. In addition, the company makes use of a mixture of value and prestige in pricing strategies in determining the cost of its products. The strategy used for pricing on the company products includes the strategy of value added pricing and prestige pricing. In value added pricing, the company spends a lot in trying to create additional values in its products through promotion. Prestige pricing happens through adding extra features for its customers on their apparel instead of trying to reduce the total cost of by reducing the features used and the material quality used in producing the yoga pants products. The use of unique features in manufacturing the yoga wears made by Lululemon, such as the use of natural substance clothing in production of yoga pants, helps in justifying the high prices of the Lululemon’s pants in the market. On the other hand, the company also employs the use of prestige in pricing

Wastewater management Research Paper Example | Topics and Well Written Essays - 500 words

Wastewater management - Research Paper Example In an era where people in the communities are gaining more knowledge about issues of the environment and their impact on the globe, it is everyone’s responsibility to use, establish and put into practice inventive ways of managing wastes and resources (World Resources Institute, 1996). Wastewater refers to water that has been hugely affected in condition by the influence of anthropogenic. These constitute liquid waste produced by industry, domestic properties, agriculture and/or commercial properties and can take in an extensive variety of probable concentrations and contaminants. Moreover, municipal wastewater is frequently treated in an effluent sewer, sanitary sewer, septic tank or combined sewer. It is likely to establish an association between contaminants of waste in a wastewater watercourse, but such a correlation cannot be simplified for operation with any additional wastewater course or waste impurities. This is because the constitution of any wastewater course is dissimilar (World Resources Institute, 1996). Many of the country’s sewer and water infrastructures were devised and constructed in the early days. These systems were made with a short life period in mind. Currently, as a result of this, there is a shortage in communal facility spending. This imposes heavy costs of repair for the future generations. The present water and sewer infrastructure cannot sustain the growing human population or exist for a long time without the need for thorough rehabilitation. Aging infrastructure and increasing amounts of waste water are increasing the cost of obtaining clean water. In addition, the environment is increasingly being affected negatively by these factors (World Resources Institute, 1996). It is not healthy for wildlife, domesticated animals, and human beings to get into contact with ground or surface water that is contaminated with waste or drink it. Wastewater management is an essential function in upholding

America in Transition 1801-1848 Assignment Example | Topics and Well Written Essays - 500 words

America in Transition 1801-1848 - Assignment Example President Jackson asserted that removing the Indians was necessary in order for them to maintain their culture, which could not be possible if they mixed up with the Americans. He announced that the two major tribes of the Indian community had already agreed with the terms for their removal, and supported this by saying that this was a good example to the rest, who would soon follow the same path as they seek similar compensation (Lewis 2001). The building of the Erie Canal illustrated the confluence of a vision. It took 15 years to be completed beginning from 1817 to 1832. It was viewed by many as the dream of Washington, who is believed to have a great understanding of the significance of transport and communication in nation-building. However, he did not live to see the completion of the canal (Bernstein 2005). It created a significant landing point for the sea vessels at New York City. The river barges were used for transportation of the cargo from these vessels to far places such as Chicago. The canal facilitated the growth of the New York City which became a major port in the United States. With time, Chicago also followed similar developments as in New York City. The population of the two cities rose as the two cities became the largest of all the cities in America. Construction of the canal received public support, notably from particular public officials who according to (Bernstein 2005) included â€Å"people such as Morris, who represented the first Continental Congress†. Bernstein further notes that the public was excited regarding the canal as they saw it as a major step towards achieving prospects of acquiring the capability of transporting commodities which included salt and others such as gypsum to far places through it. This was not possible before the construction of the canal. There used to be no trading activities between merchants from the East and the West.

Soy Food and Semen Quality Essay Example | Topics and Well Written Essays - 1000 words

Soy Food and Semen Quality - Essay Example This paper also provides brief summaries of the articles for easy analysis and understanding of the subject matter. The article reports the inverse relationship between the consumption of soy products and isoflavone compounds with respect to sperm count. It states the findings of the original research that men who consumes soy food at an average of one-half serving per day will likely to have lower concentrations of sperm cells. It also highlights that the effects of soy products on sperm productions are heightened on people who are obese or overweight. The article reports on the results of the experiments on animals and points out that there is insufficient evidence that will prove the effects on human reproduction at this point. It also mentions the 15 soy-based foods that were used by Dr Jorge Chavarro and his colleagues on their research: "tofu, tempeh, soy sausages, bacon, burgers and mince, soy milk, cheese, yoghurt and ice cream, and soy products such as roasted nuts, drinks, powders and energy bars."(1) It also relays the conclusion of the research which stated that the inverse relationsh ip between the soy products and sperm count is more evident on people with higher sperm concentration and who are overweight. B. Research Article: Soy food and isoflavone intake in relation to semen quality parameters among men from an infertility clinic Previous researches prior to their study proved the adverse effects of high concentrations of isoflavone compounds which are found on soy-based products on animals but data on its effects on human beings are limited. Chavarro et al. (2) test this relationship on human beings through semen analysis. The semen samples came from 99 qualified male donors and where analyzed at Massachusetts General Hospital Fertility Center. These men were also asked to provide information on their diet involving the 15 soy foods during their last 3 months of consumption. For the statistical analysis, they used linear regression on the male consumption of soy foods and quantile regression for the sperm concentration distribution. The results show that there is an inverse relationship with the soy food consumption and sperm concentration. The results were more seen on the 90th and 75th percentile or those with higher sperm concentrations and on the obese males. The authors conclude that higher intakes of s oy foods and soy isoflavones are related with lower sperm concentrations among males. III. ASSESSMENT For the truthfulness of the media report based on the original research article, the news article has reported the relationship between intakes of soy products with sperm concentrations similar with the findings of the research. The report has cited the important facts in the research study that will prove the linkage of soy foods and sperm concentrations. However, the research article did not focus much on the actual serving size of the soy products but more on the amount of soy food intakes. Although the survey that they used on getting

Critical thinking Essay Example | Topics and Well Written Essays - 1000 words - 4

Critical thinking - Essay Example interventions in Iraq, Kuwait and Afghanistan could expose much severe similar incident - says the article. President Obama claims to achieve a significant saving of atleast U.S.$ 40 billion dollars an year through strong interventions in the contract awarding process. According to the reports, abolishing no-bid contracts and reducing the outsourcing level of government works to the private agencies are the major ones in the proposal. The articles communicates clearly the commitment of Barack Obama by emphasizing that the money from the people of America need to be utilized to satisfy their priorities rather than allowing it flow through the drains. The necessity of radically transforming the feeble system of contracting also adds to the Obama’s interest to provide a good public administration. The initiatives taken by the present President includes issuing clear directions to his Budget Chief for evolving appropriate guidelines to evaluate the existing contracts for their via bility. Based on which they could be either modified or even cancelled. In addition, the Budget director is also asked to strictly monitor the entire no- bid contracts and the operations of the private companies working with the government also would give a fresh impetus into these things. The article substantiates the President’s claim with very clear figures. The award of contract for undertaking the restoration work of Iraq’s Oil production was through non-competitive manner to then Vice-President Dick Cheney. And, spending of millions of dollars without proper accountability in Iraq and Afghanistan, over spending in over 95 defence projects are some of the few specific references made by him. As per the content in the article, the message Obama spreads is very clear. Contracting works would no longer be in a flexible budget form, the fixed price of the contacts would soon force all the contractors to assess their costs in a realistic manner. The

Ethics Goes To Hollywood Essay Example for Free

Ethics Goes To Hollywood Essay When we think of ethics with regards to Hollywood, some people might even question if there really are any left? With the growing number of moralists and critics that easily target Hollywood, ethics has become an important factor that seems to be set aside. Many of the movies that are being shown today presents violence, nudity and lack of values incorporated with the film. But there can always be an argument about how is ethics really perceived through the movie industry? Some might doubt but actually when we look pass through over-all violence and those unacceptable factors to moralists, some movies do posses ethics in them. Most of the time, those ethics are just overlooked by the over-all presence of the movie. When we analyze and breakdown a movie and study the characters there is a great opportunity to realize the moral fiber of the film. In recent memory, there are only a few movies that have produced an unusual style of presentation in the silver screen. One of those movies showed up during 2007 through a film titled â€Å"300†. It was based from Frank Millers graphic novel also named â€Å"300†. This movie adaptation of the novel is also based from the Battle of Thermopylae that was retold in a fictional sense. To further analyze the movie, the following paragraph will showcase the movies summary. Beginning with the presentation on a how a Spartan boy grows up and how he emerges to be king of Sparta, the movie was narrated by Dilios, a spartan soldier who was able to live and tell the tale. After years of being Spartas king, Leonidas received a messenger who was sent by the Persian ruler Xerxes. The messenger presented an offer that enraged king Leonidas, leading the messenger kicked down a seemingly bottomless pit. The message was sent clear, the Persian army is about to come, to invade Sparta and add it up to their growing territory. King Leonidas then consulted the Ephors, priests who consult the oracle for answers from the gods. Proposing a plan to block the Persian army by defending the Hot Gates of Thermopylae, King Leonidas was furious by the Ephors advice of not to fight because the oracle said that it was forbidden and the gods will get enraged if they do. Despite all of this, Leonidas stood strong with his firm decision to defend the Hot Gates. He gathered 300 of the greatest Spartan soldiers and assembled a party that would hold off thousands of Persians. As they have reached the Hot Gates, they defended it for days just to protect Sparta. King Leonidas courageously led the way by standing strong to his principles until the end. The number of the Persian army was too much for the 300 Spartans and eventually led to their deaths. Only one soldier was tasked to return to Sparta to tell the tale, Dilios, who forever made Leonidas and the 300 Spartans, remembered. LEONIDAS AND HIS VIRTUES The whole essence of the story evolved in Leonidas answer to his ethical dilemma that concerned with his decision to push through despite a number of people prohibiting him. One example was when he was discouraged by the Ephors or priests to pursue his plan because it was the time of the Carneian festival. His ethical dilemma would be is that if he pushes through with his plan, he would be disrespecting the Carneian but he would be able to salvage some time to defend Sparta. Despite the senates disapproval of sending the whole Spartan army, Leonidas faced his dilemma by standing strong with his beliefs and forming an army of 300 to continue his plan. Another example would be seen during the scene where the Persians were negotiating with Leonidas. First was during the arrival of the Persian messenger who offered Leonidas salvation of the Spartans from the Persian army if he yields. Another was during their stay at the Hot Gates, when King Xerxes himself talked to Leonidas personally and again proposed to have them spared if he yields to the Persians. Both of these instances presented a same result, Leonidas refusing to give up and standing strong to his principles. Choosing the side of whats right than whats wrong, suggests Leonidas firm ethical correctness and proper morality virtues. OTHER ETHICAL THEORIES PRESENTED Egoism is also depicted in the movie as seen in Xerxes motivation to rule and conquer the world. His actions towards self-interests boost his drive to invade and gain territories. In one instance, he even called himself the king and ruler of the world. A little bit of Egoism can also be attributed to Leonidas. His strong desire to win and his confidence to bring only 300 soldiers despite knowing that his enemy would be thousands in number suggests a showing of Egoism. CONCLUSION When we analyze the definition of ethics we easily incorporate it with whats write and whats wrong. Most of it solely depends on how we make that decision. The movie â€Å"300† despite its over-all violent nature still possessed that essential factor of morality and the integration of ethics through the characters, most especially Leonidas. Being the Spartan king, his decision to protect his kingdom by defending the Hot Gates despite disagreements by the senate and the priests caused his ethical dilemma. By overcoming this dilemma and choosing what he knows is right, it created a chain of events that lead to his popularity and immortality through the help of the story thats still known up to today. Despite Xerxes tempting offers in order for him to surrender, Leonidas strong principles carried him all the way to legendary proportions. Driven by a kings instincts, Leonidas died for the people of Sparta which caused them to be more inspired and more driven to defeat the Persian army that arrived pass the Hot Gates. All in all, despite Hollywoods descending reputation in accordance with moralists, people can still find ethics in movies. People just need to look pass through and analyze the details to get the even bigger picture. References Mackie, J L. (1977). Ethics: Inventing Right and Wrong. New York: Penguin Books. Simpson, R. H. (1972). Leonidas Decision. Phoenix (Vol 26, pp. 1-11).

Effects of Central Bank Independence on Inflation Rates

Effects of Central Bank Independence on Inflation Rates Abstract This paper analyses and explains the effects of central bank independence on a countrys inflation rates and its economic performance thereafter. It deals with the benefits believed to come along with independence and the delegation of monetary policy to the central bank, the determinants and accuracy of the index of central bank independence (CBI), and the different impact that CBI has on developed and developing countries. The studies and test conducted have shown that CBI lowers inflation in developed countries but in developing countries it might have the reverse effects, mainly due to the degree of independence, and factors like traditions, the law, and the statue of the economy which vary across countries. 1. Introduction This paper intends to study the relationship between central bank independence (CBI) and inflation levels among different countries; developing and industrialized. The main research problem that I intend to examine is whether central bank independence can lower the inflation rates of the countries that grant independence to their central banks, and whether this can lead to improved economic performance. What is discussed in this paper is not only whether central bank independence (CBI) can lower inflation and hence inflation variability, but also whether this can be achieved at low cost. The economies presented in the study include both those of the developed countries, e.g. the U.K., as well as those in transition e.g. Russia that have recently gained entrance in the EU. In this paper I analyze the impact of CBI on inflation, the benefits that are believed to come along with CBI and the factors used in measuring CBI. You will see that CBI can have different forms of measurement that produce slightly different results, hence the effectiveness of the CBI index is also analyzed. The reason for choosing this topic for further study is simply because during the past two decades there has been a considerable move towards central bank independence across several countries, with the belief that this will improve their inflation levels and thus contribute to economic growth. However, as you will see further on, this is not always the case, as some studies have revealed contradicting results, and economists and academics continue their studies to get a clerer picture of this issue. 2. The Spread of CBI and The Reasons for It To begin with, it is amazing how fast CBI has spread among countries and governments since the late 1980s. One simple explanation of this spread is A.Alesinas (1988; 845) statement: independent central banks have been associated with a lower average inflation rate and may have been responsible for reducing politically induced volatility of monetary policy and inflation 2.1 Should a central bank become independent? Folder (2005) explains that CBI was adopted to avoid possible disputes between political parties as a central bank is seen as a provider of information. Many economists have expressed their opinion on the spread of CBI; others have linked it to a way of avoiding the blame of political failure by some governmental parties (Miller, G. 1998, White 1994). Others have linked it to the infrequent changes of the government (de Haan and vant Hag, 1995). That is, central bank independence in many cases was adopted after periods of high inflation in order to reduce it, due to the inflation targeting function a central bank is capable of pursuing. It can also be associated with the attraction of foreign investment and hence economic growth as a consequence of the targets set and the autonomy with which the bank can then operate (Maxfield, 1997). In countries within the European Union, CBI is a perquisite following the Maastricht Treaty (1992) for adopting the euro currency. Overall and according to Folder (2005), independence has always been related to the adoption of anti-inflationary measures for pursuing monetary policy, but its explanation lies within the sociology of the financial elites and the politics legitimizing their policy preferences. The reasons behind achieving price stability through gaining central bank independence, Cukierman (1996) explains are several and include; the breakdown of other institutions like the European Monetary System (EMS) that had been responsible for maintaining price stability which is considered as the single and most significant objective of a central bank. Ilieva and Gregoriou (2005) suggest that in transition economies central bank independence has increased mainly due to the desire of such countries like e.g. Czech Republic, Poland, Romania, etc., to join the European Union and the acquis communautaire that applicant countries should adopt. As they continue to reason the addiction to CBI, they add that another incentive for CBI is the international financial institutions such as the IMF (International Monetary Fund) that require certain criteria to be met before making unconditional loans, and these criteria are feasibly met with the help of CBI. Also, countries are attracted to CBI as this will attract potential investors by improving the nations creditworthiness. Cukierman, A. (1996) analyses developments since the late 1980s to the legal independence of central banks and to its meaning; the measurement of CBI, the interaction of central banks with the government, its effect on the economy, its determinants, etc According to Cukierman, the trend towards CBI is due to a quest for price stability which is due to the following two reasons: First, following the stagflation of the seventies and the adverse economic performance of some high inflation countries, in Latin America and elsewhere, conventional wisdom concerning inflation and real growth has changed. Whereas during the sixties the accepted view was in line with Keynesian dogma, that some inflation is good for growth, during the eighties and nineties became that inflation and the associate uncertainties retard growth. (1996; 3) The good economic performance of Japan and Germany, countries with already low inflation added more value to the above concept. Second, the rapid growth and internationalization of capital markets raised the importance of price stability as governments and private investors sought to enhance their access to broadening world financial markets. (1996; 3) 2.2 Types of Central Bank Independence Independence with regards to central banking can be categorized into different groups, depending on the degree of freedom and the subject from which the central bank becomes independent. The major types of independence are; Legal independence, where the bank is partly accountable to the government and legislation provides a framework within which the central bank and the government cooperate on certain issues. This form of independence varies significantly among countries as it depends on how strong in the law in each country and the degree to which it is followed. However, the degree of legal independence, namely LVAW, as it will be shown below, has been used by many as a major index of measuring the degree of CBI. Goal independence refers to the case where the central bank is allowed to set its own goals, e.g. price stability, money supply, inflation targeting. However in most cases under this type of independence, the bank will decide on its goals with the confirmation of the relevant governmental departments. In this way, goal independence helps avoiding conflicts among fiscal and monetary policies, and increases the level of transparency and credibility of the central bank over its goals. Operational independence is the most common form of independence and is followed by many central banks around the world, for instance, the Bank of England since 1997. It involves the government setting the banks goals e.g. a 2% level of inflation, but the central bank being free to choose the instruments e.g. interest rates, to meet the targets set by the government. Another form of independence is managerial independence, by which the central bank has the power of appointing its own stuff, set its budget, etc. This form is a necessity for the existence of the other abovementioned forms of central bank independence and is therefore granted to all central banks that can call themselves independent. 2.3 The case for central bank independence There is a huge surge towards central bank independence by both the public and the governments, in the belief that independent central banks will not only achieve low inflation rates and price stability, but will subsequently lead to long-term economic growth and development. However CBI is an issue that needs further research before determining whether it should be adopted by all countries. This depends on the economic state of the country, whether it is a developed or a developing country or even on the demand of autonomy by the political parties within the country since by granting independence the government must pass to the bank the responsibilities of e.g. controlling the interest rates, etc. over which it used to have the power. Another issue that needs to be examined before granting independence to a central bank is the political stability and the degree of uncertainty within the country. This is because in times of uncertainty and instabilities, e.g. prior to elections, the public favours CBI as an independent central bank is more objective in its role and always forward looking without ignoring the long-term effects of its decisions. The majority of the parties affected by the actions of an independent central bank, i.e. the government as well as the general public are attracted by CBI because of the greater accountability and transparency the bank is equipped with when adopting a greater degree of autonomy. Moreover, it is expected to bring lower levels of inflation and this is the main reason why people welcome CBI and the number of central banks becoming independent has been increasing over the years. The main reason behind this expectation is because a central bank generally acts in favor of the public and in addition to the fact that it becomes free from the government and any political pressures, it is in a position to avoid short-term temptations regarding low interest rates which the government usually uses prior to electoral periods, for the sake of long-term low inflation and price stability, which in combination with other exogenous factors can result in economic growth. Moreover, when a central bank gains its independence through institutional reform it becomes capable of appointing its own governor thus it moves away from political interference, and can also set an explicit inflation target. Additionally and as Carlstrom, T.C. and Fuerst, S.T. (2006) explain independence helps a central bank in constraining the behavior of fiscal authorities. That is, it can prevent people and especially the government following fiscal policy from acting in their short-term best interests, recognizing that any actions taken in the short-term e.g. lowering the interest rates to attract investments, may become undesirable in the long-term, e.g. rising inflation levels as with higher demand from low interest rates, the prices will likely increase. In this way, CBI also prevents the fiscal authorities from inflating the short-term for delivering e.g. favorable exchange rates. Hence, monetary policy can run in a more credible way and following the targets set, markets w ill know what to expect thus shocks will be limited. However an independent central bank is also likely in extreme cases to bring so low levels of inflation that can be harmful to the economy. According to Epstein, G. (2007), the 3.5% drop in inflation levels by countries adopting an inflation-targeting monetary policy (IMF, 2006) is questionable as to whether this decline will improve economic growth. Explicitly, if the inflation level of a country is already low and the central bank adopts an inflation-targeting monetary policy then the resulting lower inflation level might prove dangerous to the economy by generating economic cycles. Cukierman (1996) has developed two separate approaches for reasoning the urge towards central bank independence and explaining the benefits that can be enjoyed from independence. These include; the theoretical approach according to which in the short-run monetary policy can be conducted in such a way that it allows for some inflation so that it can achieve employment, high economic activity and low interest rates. Hence, policy makers can expect some degree of inflation which they will present in the form of nominal wage and capital market contracts. In this way however, policy makers will have to keep inflation at a level that would balance the real equilibrium if they had been committed to zero-inflation. As a result of this discretionary use of monetary policy, this is subject to inflationary bias, and this bias can only be minimised if monetary policy is delegated to an independent central bank because only this institution is free to choose how to operate monetary policy and takes interest mostly if not only to price stability. And the empirical approach by which the case of CBI lies on empirical evidence showing that countries with an independent central bank have lower inflation rates and higher growth rates per capita output. An example of such a country is New Zealand: 2.3.1 The case of New Zealand New Zealand is a country whose central bank managed to drop the inflation level after being granted with greater independence. The Reserve Bank of New Zealand was granted independence in 1989 following the Reserve Bank of New Zealand Act of 1989 and had therefore established an explicit inflation target. The result was to reduce inflation levels from 7.6% during the years 1955-1988 from when the reserve bank was not independent, down to just 2.7%, after becoming independent, during the period 1989-2000. The latter rate is now considered one of the lowest among industrialized countries. It is obvious that among all OPEC countries, the central bank of New Zealand managed to achieve the lowest inflation rate, especially during the 1990s. What happened during the period of the inflation reduction was that the reserve bank of New Zealand went through a reform that resulted in it being granted with independence and a greater degree of autonomy, leading to low inflation. Specifically, prior to 1989 it used to be an arm of the government. Monetary policy used to be subject to the ministry of finance and therefore the government. As a result, the level of independence was one of the lowest among industrialized countries, while the level of inflation was of the highest. Even then, the relationship between central bank independence was negative, even though the results were the reverse of what is considered optimum, i.e. greater independence, lower inflation. In 1989, the Reserve Bank of New Zealand Act was passed by law. This act codifies inflation targeting and gives more autonomy to the countrys central bank in order to meet its objectives. According to the Act the central banks primary function is: to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices. (Reserve Bank of New Zealand Act, 1989 as quoted in Carlstrom T.C. and Fuerst, S.T., 2006, p.3). The impact of the Act on New Zealands economy and specifically the Reserve Banks autonomy can be seen in figure 2 below, which compares the degree of independence across different time periods and among different countries. The findings of the New Zealand case show that if the country had adopted independence earlier then its average inflation rate would be 3.4% rather than 7.6% that it actually used to be, assuming all other things being equal. Following this assumption, CBI itself would be sufficient to reduce worldwide inflation levels from 5.6% down to 3.8%. Despite the considerable drop in New Zealands inflation rate it is still questionable whether this drop was caused solely by CBI, and it is difficult, if not impossible, to quantify by how much the inflation reduction was due to CBI. Firm conclusions cannot be made yet since the data used in this case is of limited sample size and comparisons would therefore be insufficient. What is true is that the relationship between CBI and inflation is similar across time. Any changes to the strength of this relationship are mostly due to macroeconomic and other factors such as the state of the economy, the state of the government, e.g. democracy, etc. and others that will be explained later in this paper. 3. Measuring Central Bank Independence The degree of CBI for each central bank varies according to the state of each country and to compliance with the law. As Cukierman explains, in developing countries where compliance with the law is poor, a suitable proxy for CBI would be the turnover of central bank governors, whereas in industrialised countries such a proxy would be legal independence. Generally, when the appropriate index of independence is used, the results indicate an inverse relationship between CBI and inflation. However, care should be taken not to mistake legal independence with actual independence, as legal independence is necessary but does not guarantee actual independence; legal independence is a necessary, but not a sufficient condition for a truly independent CB. (Cukierman, A., 2001; 7). Exceptions exist, like developed countries, where legal independence seems to be a good proxy because law is highly complied. For a clearer picture of the effectiveness of CBI on the economy, it is preferred that some variables that make up the CBI index are used in combination, or that some indices are used only for a specific purpose. For instance, legal independence is a good proxy for actual independence in developed countries rather than in developing ones. 3.1 The Cukierman Index of CBI The method that will be used the most in this paper to measure the degree of central bank independence and its relationship with inflation will be Cukierman Index (1992), the most widely accepted and used index for this purpose. Initially, the exact definition of the Cukierman Index according to Siklos, P. (1992; 65) is: An indicator of the degree of autonomy enjoyed by several central banks. Cukierman Index to demonstrate graphically the measures of CBI and inflation during two different decades, namely the 1980s and the 1990s: As can be seen in the above graphs during the 1980s even though CBI was not common across countries, there was a negative relationship between CBI and inflation level. This means that the greater the level of independence of a central bank, the lower the level of inflation within the particular country. It is thus obvious that the correlation between CBI and inflation is negative, whereas the errors overall are not fitted closely on the regression line. We should note however that the decade of 1980s was before central banks especially those within industrialized countries underwent major reforms in their statutes which then allowed them a greater degree of autonomy. During the 1990s as Siklos, P. (2002) explains, most central banks went through a reform, as there was a trend towards CBI. As a result the overall degree of CBI increased and all index values were revised upwards, the government granting more autonomy to central banks, in the belief that greater independence would just be adequate for lowering the level of inflation. However, the relationship between CBI and inflation during the 1990s turned out to be the reverse of that of the previous decade. That is, the correlation between CBI-inflation now became weaker but positive since the regression line on the scatter gram in figure 3b has an upward slope, meaning that inflation increases with the degree of independence. It is hard to explain what was wrong with the findings of the 1990s that caused the correlation to be positive, however one might argue that CBI increased for all countries during the 1990s and so it also reflects the inflation performance of the previous decade, although the more independent central banks have delivered lower inflation levels in the 1980s. Furthermore, the Cukierman Index used is believed to contain some inaccuracies concerning the measurements of the degree on independence and thereafter the relationship of that with inflation because it was extended from the 1980s towards the 1990s in a different way than the one initially specified. For this reason more tests will be carried out to explain and compare the effectiveness of measuring CBI using the Cukierman Index in contrast to other indices developed for the same purpose, for instance Alesina and Summers Index. The Cukierman Index will also be used to test the effect of CBI on inflation in transition economies, based on Ilieva and Gregoriou (2005) paper regarding inflation performance, i.e. average inflation and inflation variance, and CBI in transition economies during the period 1991-2003. 3.2 The determinants of the CBI index The degree of independence varies across countries. This is not only due to factors such as the type of independence of each bank, although the most common is operational independence, the degree of law compliance in each country, and tradition, but some other systematic factors as well. Such factors are described and categorized by Cukierman, who presents some hypotheses on these factors: Hypotheses about the determinants of CBI Initially, it is widely accepted that any form of inflationary bias raises the independence of central banks to the degree that politicians wish to grant to the CB. The main idea behind this concept is that the benefits of delegating monetary policy to an independent central bank will be higher when inflation bias is higher in instances of e.g. employment reaction to inflation shocks. This delegation according to Cukierman helps in preventing the competing political party from taking on activities not favoured by the government. Secondly, Cukierman et al (1992, 2001) make the hypothesis that: the wider are the financial markets and the more elastic the supply of funds to government with respect to the interest rate, the more likely is the CB to be independent. (2001; 19). Additionally, Maxfield (1995) supports that political authorities favour CBI where there is need for funds. When this need is high as he explains, the government delegates more authority to the central bank in order to signal the nations creditworthiness. Finally, the cases of countries that have experienced extremely high levels of inflation in the past, like Germany, Austria, and Brazil, show that such countries are more likely to delegate independence to a central bank so that politicians do not interfere with monetary policy. 3.3 The measurement of the CBI Index Due to the widespread concept that the degree of independence of a nations central bank plays a crucial role upon the policy actions and inflation, Cukierman (1992) presents an analysis of the effects of CBI on inflation and provides various indicators of CBI. However, as he explains, the degree of CBI is determined by several factors from legal to cultural some of which are difficult to measure and quantify, therefore the impact of CBI on inflation varies among countries and there is a certain degree of uncertainty about the level of CBI. As a result, the measurement and the creation of an index of CBI have been based on legal independence, as the degree of CBI also depends on the degree of independence granted to the bank by the law. Despite the variations in the degree of CBI, it can be deduced that a low degree of CBI is linked with higher levels of inflation and inflation variability, while the level of credibility of a central bank with a low degree of CBI will be lower. Cukierman presents three different sets of indicators of CBI; a proxy for legal independence and proxies for the deviations of actual from legal independence. Independence measured under these proxies is limited specifically to the Central banks ability to meet a single objective; price stability. The reason for using several proxies in measuring CBI is because each proxy is a noisy indicator that captures a somewhat different aspect of CB independence (Cukierman, 1992; 370), so using a combination of them reduces this noisiness of the overall measure 3.3.1 Measuring and Coding Legal Central Bank Independence Using a proxy of legal independence is vital in making comparisons with previous studies on the impact of CBI on economic issues because all existing attempts on the features of an independent central bank rely on the banks legal independence. Cukierman presents the indices of legal aspects of CBI by separating into four groups the variables which make for a legally independent central bank. These groups are: Chief executive officer: CEO Policy formulation: PF Final Objectives: OBJ Limitations on lending: LLand codes them by the degree of independence of each group for the central bank of each of the countries included in the study. The main assumptions made are; the central banks whose single objective is price stability are considered to be more independent, so are central banks with stricter limitations on lending from the CB. The coding involves sixteen different variables in a scale from 0 (least independence) to 1 (maximum independence), during the time period 1950-1989, separated into four different decades. Due to the narrow definition of each of the variables used and the consequent lack of precision and multicollinearity problems that may arise, these variables are aggregated into eight legal variables by just calculating the unweighted mean of the codings used. Furthermore, it is necessary to have an additional single index of legal independence for each country to assess the aggregate legal independence of the CB. This index can have two alternatives, the LVAU and the LVAW, that are computed by calculating the average of the codings of the first eight variables as described above. Table 1 in Appendix A shows the ranking of the countries according to the legal independence of their central banks as measured by the LVAU during the eighties decade. The LVAW would also give a similar picture. Looking at the table of results one can see that among the seven most highly-ranked countries four are developed (Switzerland, West Germany, Austria and U.S.), while among the seven least-ranked countries four are less developed (Morocco, Panama, Yugoslavia and Poland). Generally, the top 10% of the rankings is comprised of developed countries, whereas the bottom 10% is concentrated with less developed countries. One should also note that there had been no hyperinflation experienced by developed countries during the 1980s, while some of the Latin America countries have, e.g. Brazil and Bolivia with a rate of 230%. This according to Cukierman may suggest that legal CBI may be neither necessary nor sufficient for low inflation. (1992; 382). 3.3.2 The turnover rate of Central Bank governors as a proxy for actual independence As already explained, the legal status of the central bank is just one of the several determinants of actual CBI. There is no clear systematic indicator of actual CBI, but Cukierman (1992) presents two sets of such indicators. One is based on the actual turnover rate of the central banks governor, and the other is based on the answers given to a questionnaire on CBI. Table 2 in Appendix B shows the CB governors turnover rates for the period 1980-1989. It is assumed that the lower the turnover rate the higher the degree of actual independence. Although the results are chronologically old, it is obvious that turnover rates in less developed countries occupy a range that has never been experienced by developed countries. It is indicative that more than half of the less developed countries have a turnover rate higher than the maximum of the rate of developed countries. It is clear that less developed countries experience higher inflation rates, on the grounds of lower actual CBI. On the other hand, low turnover does not necessarily imply a high level of CB independence on the grounds that a relatively subservient governor will tend to stay in office longer than a governor who stands up to the executive branch. (Cukierman, 1992; 385) Critically assessing the results, since the maximum turnover rate for developed countries is 0.2 (.e. five years) suggests that the turnover proxy may not be effective proxies for actual CBI for the sample of developed countries, whereas this proxy can be considered indicative for the sample of developing countries since these have turnover rates exceeding 0.2. 3.3.3 Central Bank Independence from answers to a questionnaire Another aspect of characterizing CBI is the questionnaire. Under this method, answers were obtained from qualified central bankers from twenty-four countries during the period 1980-1989. The main questions asked covered the issues of; legal independence, final monetary policy objectives, monetary policy instruments, actual independence and its divergence from the law and intermediate targets and their indicators. In coding the variables of the questionnaire, the bank is assumed to be more independent, all other things being equal, if the following hold; the term of office of the CB governor is longer than that of the government, limitations exist on lending from the CB which the government is in no position of altering, and in cases where stock targets exist because these mean that the CB is more free to meet its price stability target. Table 3 in Appendix C shows the ranking of central banks by aggregate indices of independence according to questionnaire responses. The aggregate indices of QVAU and QVAW reflect the law and the way it is implemented in practice respectively, as well as important information about actual independence, and are very similar (à ?=0.99). The rankings agree to earlier studies that central banks of developed countries are more independent. However, the median of QVAU for developed countries, that is 0.6 for Britain and Lebanon, is greater than the median for less developed countries, that is 0.49 for Uruguay, and this contradicts the above findings for legal independence using the LVAU. When measuring the degree of CBI it should be taken into account that the measures used above fail to quantify all the aspects of CBI as some are difficult to quantify. Such aspects are the quality of the banks research department and its standing in comparison to other economic research institutions within the public sector (Cukierman, 1992). Independence is generally higher in countries with highly-developed financial markets according to Cukierman because the supervision of financial institutions is under the authority of the CB, so the larger the market the more wide the span of the CBs authority. 4. Central Bank Independence and Inflation Targeting In this section the impact of central bank independence on inflation, inflation variability and the economy overall is analyzed using a model to test whether CBI can actually lower inflation, and comparing the effects of CBI by using both the Cukierman and the Alesina indices of CBI. Additionally, the costs of achieving lower inflation through central bank independence are also explained. MacCallum, B. (1995) believes that it is strong will that is necessary for proper policy behaviour by central banks, not rules and regulations. A policy maker, i.e. a central banker in this case should act immediately to an inflation shock to restore the problem without letting any sp Effects of Central Bank Independence on Inflation Rates Effects of Central Bank Independence on Inflation Rates Abstract This paper analyses and explains the effects of central bank independence on a countrys inflation rates and its economic performance thereafter. It deals with the benefits believed to come along with independence and the delegation of monetary policy to the central bank, the determinants and accuracy of the index of central bank independence (CBI), and the different impact that CBI has on developed and developing countries. The studies and test conducted have shown that CBI lowers inflation in developed countries but in developing countries it might have the reverse effects, mainly due to the degree of independence, and factors like traditions, the law, and the statue of the economy which vary across countries. 1. Introduction This paper intends to study the relationship between central bank independence (CBI) and inflation levels among different countries; developing and industrialized. The main research problem that I intend to examine is whether central bank independence can lower the inflation rates of the countries that grant independence to their central banks, and whether this can lead to improved economic performance. What is discussed in this paper is not only whether central bank independence (CBI) can lower inflation and hence inflation variability, but also whether this can be achieved at low cost. The economies presented in the study include both those of the developed countries, e.g. the U.K., as well as those in transition e.g. Russia that have recently gained entrance in the EU. In this paper I analyze the impact of CBI on inflation, the benefits that are believed to come along with CBI and the factors used in measuring CBI. You will see that CBI can have different forms of measurement that produce slightly different results, hence the effectiveness of the CBI index is also analyzed. The reason for choosing this topic for further study is simply because during the past two decades there has been a considerable move towards central bank independence across several countries, with the belief that this will improve their inflation levels and thus contribute to economic growth. However, as you will see further on, this is not always the case, as some studies have revealed contradicting results, and economists and academics continue their studies to get a clerer picture of this issue. 2. The Spread of CBI and The Reasons for It To begin with, it is amazing how fast CBI has spread among countries and governments since the late 1980s. One simple explanation of this spread is A.Alesinas (1988; 845) statement: independent central banks have been associated with a lower average inflation rate and may have been responsible for reducing politically induced volatility of monetary policy and inflation 2.1 Should a central bank become independent? Folder (2005) explains that CBI was adopted to avoid possible disputes between political parties as a central bank is seen as a provider of information. Many economists have expressed their opinion on the spread of CBI; others have linked it to a way of avoiding the blame of political failure by some governmental parties (Miller, G. 1998, White 1994). Others have linked it to the infrequent changes of the government (de Haan and vant Hag, 1995). That is, central bank independence in many cases was adopted after periods of high inflation in order to reduce it, due to the inflation targeting function a central bank is capable of pursuing. It can also be associated with the attraction of foreign investment and hence economic growth as a consequence of the targets set and the autonomy with which the bank can then operate (Maxfield, 1997). In countries within the European Union, CBI is a perquisite following the Maastricht Treaty (1992) for adopting the euro currency. Overall and according to Folder (2005), independence has always been related to the adoption of anti-inflationary measures for pursuing monetary policy, but its explanation lies within the sociology of the financial elites and the politics legitimizing their policy preferences. The reasons behind achieving price stability through gaining central bank independence, Cukierman (1996) explains are several and include; the breakdown of other institutions like the European Monetary System (EMS) that had been responsible for maintaining price stability which is considered as the single and most significant objective of a central bank. Ilieva and Gregoriou (2005) suggest that in transition economies central bank independence has increased mainly due to the desire of such countries like e.g. Czech Republic, Poland, Romania, etc., to join the European Union and the acquis communautaire that applicant countries should adopt. As they continue to reason the addiction to CBI, they add that another incentive for CBI is the international financial institutions such as the IMF (International Monetary Fund) that require certain criteria to be met before making unconditional loans, and these criteria are feasibly met with the help of CBI. Also, countries are attracted to CBI as this will attract potential investors by improving the nations creditworthiness. Cukierman, A. (1996) analyses developments since the late 1980s to the legal independence of central banks and to its meaning; the measurement of CBI, the interaction of central banks with the government, its effect on the economy, its determinants, etc According to Cukierman, the trend towards CBI is due to a quest for price stability which is due to the following two reasons: First, following the stagflation of the seventies and the adverse economic performance of some high inflation countries, in Latin America and elsewhere, conventional wisdom concerning inflation and real growth has changed. Whereas during the sixties the accepted view was in line with Keynesian dogma, that some inflation is good for growth, during the eighties and nineties became that inflation and the associate uncertainties retard growth. (1996; 3) The good economic performance of Japan and Germany, countries with already low inflation added more value to the above concept. Second, the rapid growth and internationalization of capital markets raised the importance of price stability as governments and private investors sought to enhance their access to broadening world financial markets. (1996; 3) 2.2 Types of Central Bank Independence Independence with regards to central banking can be categorized into different groups, depending on the degree of freedom and the subject from which the central bank becomes independent. The major types of independence are; Legal independence, where the bank is partly accountable to the government and legislation provides a framework within which the central bank and the government cooperate on certain issues. This form of independence varies significantly among countries as it depends on how strong in the law in each country and the degree to which it is followed. However, the degree of legal independence, namely LVAW, as it will be shown below, has been used by many as a major index of measuring the degree of CBI. Goal independence refers to the case where the central bank is allowed to set its own goals, e.g. price stability, money supply, inflation targeting. However in most cases under this type of independence, the bank will decide on its goals with the confirmation of the relevant governmental departments. In this way, goal independence helps avoiding conflicts among fiscal and monetary policies, and increases the level of transparency and credibility of the central bank over its goals. Operational independence is the most common form of independence and is followed by many central banks around the world, for instance, the Bank of England since 1997. It involves the government setting the banks goals e.g. a 2% level of inflation, but the central bank being free to choose the instruments e.g. interest rates, to meet the targets set by the government. Another form of independence is managerial independence, by which the central bank has the power of appointing its own stuff, set its budget, etc. This form is a necessity for the existence of the other abovementioned forms of central bank independence and is therefore granted to all central banks that can call themselves independent. 2.3 The case for central bank independence There is a huge surge towards central bank independence by both the public and the governments, in the belief that independent central banks will not only achieve low inflation rates and price stability, but will subsequently lead to long-term economic growth and development. However CBI is an issue that needs further research before determining whether it should be adopted by all countries. This depends on the economic state of the country, whether it is a developed or a developing country or even on the demand of autonomy by the political parties within the country since by granting independence the government must pass to the bank the responsibilities of e.g. controlling the interest rates, etc. over which it used to have the power. Another issue that needs to be examined before granting independence to a central bank is the political stability and the degree of uncertainty within the country. This is because in times of uncertainty and instabilities, e.g. prior to elections, the public favours CBI as an independent central bank is more objective in its role and always forward looking without ignoring the long-term effects of its decisions. The majority of the parties affected by the actions of an independent central bank, i.e. the government as well as the general public are attracted by CBI because of the greater accountability and transparency the bank is equipped with when adopting a greater degree of autonomy. Moreover, it is expected to bring lower levels of inflation and this is the main reason why people welcome CBI and the number of central banks becoming independent has been increasing over the years. The main reason behind this expectation is because a central bank generally acts in favor of the public and in addition to the fact that it becomes free from the government and any political pressures, it is in a position to avoid short-term temptations regarding low interest rates which the government usually uses prior to electoral periods, for the sake of long-term low inflation and price stability, which in combination with other exogenous factors can result in economic growth. Moreover, when a central bank gains its independence through institutional reform it becomes capable of appointing its own governor thus it moves away from political interference, and can also set an explicit inflation target. Additionally and as Carlstrom, T.C. and Fuerst, S.T. (2006) explain independence helps a central bank in constraining the behavior of fiscal authorities. That is, it can prevent people and especially the government following fiscal policy from acting in their short-term best interests, recognizing that any actions taken in the short-term e.g. lowering the interest rates to attract investments, may become undesirable in the long-term, e.g. rising inflation levels as with higher demand from low interest rates, the prices will likely increase. In this way, CBI also prevents the fiscal authorities from inflating the short-term for delivering e.g. favorable exchange rates. Hence, monetary policy can run in a more credible way and following the targets set, markets w ill know what to expect thus shocks will be limited. However an independent central bank is also likely in extreme cases to bring so low levels of inflation that can be harmful to the economy. According to Epstein, G. (2007), the 3.5% drop in inflation levels by countries adopting an inflation-targeting monetary policy (IMF, 2006) is questionable as to whether this decline will improve economic growth. Explicitly, if the inflation level of a country is already low and the central bank adopts an inflation-targeting monetary policy then the resulting lower inflation level might prove dangerous to the economy by generating economic cycles. Cukierman (1996) has developed two separate approaches for reasoning the urge towards central bank independence and explaining the benefits that can be enjoyed from independence. These include; the theoretical approach according to which in the short-run monetary policy can be conducted in such a way that it allows for some inflation so that it can achieve employment, high economic activity and low interest rates. Hence, policy makers can expect some degree of inflation which they will present in the form of nominal wage and capital market contracts. In this way however, policy makers will have to keep inflation at a level that would balance the real equilibrium if they had been committed to zero-inflation. As a result of this discretionary use of monetary policy, this is subject to inflationary bias, and this bias can only be minimised if monetary policy is delegated to an independent central bank because only this institution is free to choose how to operate monetary policy and takes interest mostly if not only to price stability. And the empirical approach by which the case of CBI lies on empirical evidence showing that countries with an independent central bank have lower inflation rates and higher growth rates per capita output. An example of such a country is New Zealand: 2.3.1 The case of New Zealand New Zealand is a country whose central bank managed to drop the inflation level after being granted with greater independence. The Reserve Bank of New Zealand was granted independence in 1989 following the Reserve Bank of New Zealand Act of 1989 and had therefore established an explicit inflation target. The result was to reduce inflation levels from 7.6% during the years 1955-1988 from when the reserve bank was not independent, down to just 2.7%, after becoming independent, during the period 1989-2000. The latter rate is now considered one of the lowest among industrialized countries. It is obvious that among all OPEC countries, the central bank of New Zealand managed to achieve the lowest inflation rate, especially during the 1990s. What happened during the period of the inflation reduction was that the reserve bank of New Zealand went through a reform that resulted in it being granted with independence and a greater degree of autonomy, leading to low inflation. Specifically, prior to 1989 it used to be an arm of the government. Monetary policy used to be subject to the ministry of finance and therefore the government. As a result, the level of independence was one of the lowest among industrialized countries, while the level of inflation was of the highest. Even then, the relationship between central bank independence was negative, even though the results were the reverse of what is considered optimum, i.e. greater independence, lower inflation. In 1989, the Reserve Bank of New Zealand Act was passed by law. This act codifies inflation targeting and gives more autonomy to the countrys central bank in order to meet its objectives. According to the Act the central banks primary function is: to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices. (Reserve Bank of New Zealand Act, 1989 as quoted in Carlstrom T.C. and Fuerst, S.T., 2006, p.3). The impact of the Act on New Zealands economy and specifically the Reserve Banks autonomy can be seen in figure 2 below, which compares the degree of independence across different time periods and among different countries. The findings of the New Zealand case show that if the country had adopted independence earlier then its average inflation rate would be 3.4% rather than 7.6% that it actually used to be, assuming all other things being equal. Following this assumption, CBI itself would be sufficient to reduce worldwide inflation levels from 5.6% down to 3.8%. Despite the considerable drop in New Zealands inflation rate it is still questionable whether this drop was caused solely by CBI, and it is difficult, if not impossible, to quantify by how much the inflation reduction was due to CBI. Firm conclusions cannot be made yet since the data used in this case is of limited sample size and comparisons would therefore be insufficient. What is true is that the relationship between CBI and inflation is similar across time. Any changes to the strength of this relationship are mostly due to macroeconomic and other factors such as the state of the economy, the state of the government, e.g. democracy, etc. and others that will be explained later in this paper. 3. Measuring Central Bank Independence The degree of CBI for each central bank varies according to the state of each country and to compliance with the law. As Cukierman explains, in developing countries where compliance with the law is poor, a suitable proxy for CBI would be the turnover of central bank governors, whereas in industrialised countries such a proxy would be legal independence. Generally, when the appropriate index of independence is used, the results indicate an inverse relationship between CBI and inflation. However, care should be taken not to mistake legal independence with actual independence, as legal independence is necessary but does not guarantee actual independence; legal independence is a necessary, but not a sufficient condition for a truly independent CB. (Cukierman, A., 2001; 7). Exceptions exist, like developed countries, where legal independence seems to be a good proxy because law is highly complied. For a clearer picture of the effectiveness of CBI on the economy, it is preferred that some variables that make up the CBI index are used in combination, or that some indices are used only for a specific purpose. For instance, legal independence is a good proxy for actual independence in developed countries rather than in developing ones. 3.1 The Cukierman Index of CBI The method that will be used the most in this paper to measure the degree of central bank independence and its relationship with inflation will be Cukierman Index (1992), the most widely accepted and used index for this purpose. Initially, the exact definition of the Cukierman Index according to Siklos, P. (1992; 65) is: An indicator of the degree of autonomy enjoyed by several central banks. Cukierman Index to demonstrate graphically the measures of CBI and inflation during two different decades, namely the 1980s and the 1990s: As can be seen in the above graphs during the 1980s even though CBI was not common across countries, there was a negative relationship between CBI and inflation level. This means that the greater the level of independence of a central bank, the lower the level of inflation within the particular country. It is thus obvious that the correlation between CBI and inflation is negative, whereas the errors overall are not fitted closely on the regression line. We should note however that the decade of 1980s was before central banks especially those within industrialized countries underwent major reforms in their statutes which then allowed them a greater degree of autonomy. During the 1990s as Siklos, P. (2002) explains, most central banks went through a reform, as there was a trend towards CBI. As a result the overall degree of CBI increased and all index values were revised upwards, the government granting more autonomy to central banks, in the belief that greater independence would just be adequate for lowering the level of inflation. However, the relationship between CBI and inflation during the 1990s turned out to be the reverse of that of the previous decade. That is, the correlation between CBI-inflation now became weaker but positive since the regression line on the scatter gram in figure 3b has an upward slope, meaning that inflation increases with the degree of independence. It is hard to explain what was wrong with the findings of the 1990s that caused the correlation to be positive, however one might argue that CBI increased for all countries during the 1990s and so it also reflects the inflation performance of the previous decade, although the more independent central banks have delivered lower inflation levels in the 1980s. Furthermore, the Cukierman Index used is believed to contain some inaccuracies concerning the measurements of the degree on independence and thereafter the relationship of that with inflation because it was extended from the 1980s towards the 1990s in a different way than the one initially specified. For this reason more tests will be carried out to explain and compare the effectiveness of measuring CBI using the Cukierman Index in contrast to other indices developed for the same purpose, for instance Alesina and Summers Index. The Cukierman Index will also be used to test the effect of CBI on inflation in transition economies, based on Ilieva and Gregoriou (2005) paper regarding inflation performance, i.e. average inflation and inflation variance, and CBI in transition economies during the period 1991-2003. 3.2 The determinants of the CBI index The degree of independence varies across countries. This is not only due to factors such as the type of independence of each bank, although the most common is operational independence, the degree of law compliance in each country, and tradition, but some other systematic factors as well. Such factors are described and categorized by Cukierman, who presents some hypotheses on these factors: Hypotheses about the determinants of CBI Initially, it is widely accepted that any form of inflationary bias raises the independence of central banks to the degree that politicians wish to grant to the CB. The main idea behind this concept is that the benefits of delegating monetary policy to an independent central bank will be higher when inflation bias is higher in instances of e.g. employment reaction to inflation shocks. This delegation according to Cukierman helps in preventing the competing political party from taking on activities not favoured by the government. Secondly, Cukierman et al (1992, 2001) make the hypothesis that: the wider are the financial markets and the more elastic the supply of funds to government with respect to the interest rate, the more likely is the CB to be independent. (2001; 19). Additionally, Maxfield (1995) supports that political authorities favour CBI where there is need for funds. When this need is high as he explains, the government delegates more authority to the central bank in order to signal the nations creditworthiness. Finally, the cases of countries that have experienced extremely high levels of inflation in the past, like Germany, Austria, and Brazil, show that such countries are more likely to delegate independence to a central bank so that politicians do not interfere with monetary policy. 3.3 The measurement of the CBI Index Due to the widespread concept that the degree of independence of a nations central bank plays a crucial role upon the policy actions and inflation, Cukierman (1992) presents an analysis of the effects of CBI on inflation and provides various indicators of CBI. However, as he explains, the degree of CBI is determined by several factors from legal to cultural some of which are difficult to measure and quantify, therefore the impact of CBI on inflation varies among countries and there is a certain degree of uncertainty about the level of CBI. As a result, the measurement and the creation of an index of CBI have been based on legal independence, as the degree of CBI also depends on the degree of independence granted to the bank by the law. Despite the variations in the degree of CBI, it can be deduced that a low degree of CBI is linked with higher levels of inflation and inflation variability, while the level of credibility of a central bank with a low degree of CBI will be lower. Cukierman presents three different sets of indicators of CBI; a proxy for legal independence and proxies for the deviations of actual from legal independence. Independence measured under these proxies is limited specifically to the Central banks ability to meet a single objective; price stability. The reason for using several proxies in measuring CBI is because each proxy is a noisy indicator that captures a somewhat different aspect of CB independence (Cukierman, 1992; 370), so using a combination of them reduces this noisiness of the overall measure 3.3.1 Measuring and Coding Legal Central Bank Independence Using a proxy of legal independence is vital in making comparisons with previous studies on the impact of CBI on economic issues because all existing attempts on the features of an independent central bank rely on the banks legal independence. Cukierman presents the indices of legal aspects of CBI by separating into four groups the variables which make for a legally independent central bank. These groups are: Chief executive officer: CEO Policy formulation: PF Final Objectives: OBJ Limitations on lending: LLand codes them by the degree of independence of each group for the central bank of each of the countries included in the study. The main assumptions made are; the central banks whose single objective is price stability are considered to be more independent, so are central banks with stricter limitations on lending from the CB. The coding involves sixteen different variables in a scale from 0 (least independence) to 1 (maximum independence), during the time period 1950-1989, separated into four different decades. Due to the narrow definition of each of the variables used and the consequent lack of precision and multicollinearity problems that may arise, these variables are aggregated into eight legal variables by just calculating the unweighted mean of the codings used. Furthermore, it is necessary to have an additional single index of legal independence for each country to assess the aggregate legal independence of the CB. This index can have two alternatives, the LVAU and the LVAW, that are computed by calculating the average of the codings of the first eight variables as described above. Table 1 in Appendix A shows the ranking of the countries according to the legal independence of their central banks as measured by the LVAU during the eighties decade. The LVAW would also give a similar picture. Looking at the table of results one can see that among the seven most highly-ranked countries four are developed (Switzerland, West Germany, Austria and U.S.), while among the seven least-ranked countries four are less developed (Morocco, Panama, Yugoslavia and Poland). Generally, the top 10% of the rankings is comprised of developed countries, whereas the bottom 10% is concentrated with less developed countries. One should also note that there had been no hyperinflation experienced by developed countries during the 1980s, while some of the Latin America countries have, e.g. Brazil and Bolivia with a rate of 230%. This according to Cukierman may suggest that legal CBI may be neither necessary nor sufficient for low inflation. (1992; 382). 3.3.2 The turnover rate of Central Bank governors as a proxy for actual independence As already explained, the legal status of the central bank is just one of the several determinants of actual CBI. There is no clear systematic indicator of actual CBI, but Cukierman (1992) presents two sets of such indicators. One is based on the actual turnover rate of the central banks governor, and the other is based on the answers given to a questionnaire on CBI. Table 2 in Appendix B shows the CB governors turnover rates for the period 1980-1989. It is assumed that the lower the turnover rate the higher the degree of actual independence. Although the results are chronologically old, it is obvious that turnover rates in less developed countries occupy a range that has never been experienced by developed countries. It is indicative that more than half of the less developed countries have a turnover rate higher than the maximum of the rate of developed countries. It is clear that less developed countries experience higher inflation rates, on the grounds of lower actual CBI. On the other hand, low turnover does not necessarily imply a high level of CB independence on the grounds that a relatively subservient governor will tend to stay in office longer than a governor who stands up to the executive branch. (Cukierman, 1992; 385) Critically assessing the results, since the maximum turnover rate for developed countries is 0.2 (.e. five years) suggests that the turnover proxy may not be effective proxies for actual CBI for the sample of developed countries, whereas this proxy can be considered indicative for the sample of developing countries since these have turnover rates exceeding 0.2. 3.3.3 Central Bank Independence from answers to a questionnaire Another aspect of characterizing CBI is the questionnaire. Under this method, answers were obtained from qualified central bankers from twenty-four countries during the period 1980-1989. The main questions asked covered the issues of; legal independence, final monetary policy objectives, monetary policy instruments, actual independence and its divergence from the law and intermediate targets and their indicators. In coding the variables of the questionnaire, the bank is assumed to be more independent, all other things being equal, if the following hold; the term of office of the CB governor is longer than that of the government, limitations exist on lending from the CB which the government is in no position of altering, and in cases where stock targets exist because these mean that the CB is more free to meet its price stability target. Table 3 in Appendix C shows the ranking of central banks by aggregate indices of independence according to questionnaire responses. The aggregate indices of QVAU and QVAW reflect the law and the way it is implemented in practice respectively, as well as important information about actual independence, and are very similar (à ?=0.99). The rankings agree to earlier studies that central banks of developed countries are more independent. However, the median of QVAU for developed countries, that is 0.6 for Britain and Lebanon, is greater than the median for less developed countries, that is 0.49 for Uruguay, and this contradicts the above findings for legal independence using the LVAU. When measuring the degree of CBI it should be taken into account that the measures used above fail to quantify all the aspects of CBI as some are difficult to quantify. Such aspects are the quality of the banks research department and its standing in comparison to other economic research institutions within the public sector (Cukierman, 1992). Independence is generally higher in countries with highly-developed financial markets according to Cukierman because the supervision of financial institutions is under the authority of the CB, so the larger the market the more wide the span of the CBs authority. 4. Central Bank Independence and Inflation Targeting In this section the impact of central bank independence on inflation, inflation variability and the economy overall is analyzed using a model to test whether CBI can actually lower inflation, and comparing the effects of CBI by using both the Cukierman and the Alesina indices of CBI. Additionally, the costs of achieving lower inflation through central bank independence are also explained. MacCallum, B. (1995) believes that it is strong will that is necessary for proper policy behaviour by central banks, not rules and regulations. A policy maker, i.e. a central banker in this case should act immediately to an inflation shock to restore the problem without letting any sp