Central bank institutional structure and effective central banking: cross-country empirical evidence.

Hasan, Iftekhar ; Mester, Loretta J.

INTRODUCTION

Over the last decade, the legal and institutional frameworks governing central banks and financial market regulatory authorities throughout the world have undergone significant changes. New central banks needed to be organised in the aftermath of the Soviet Union's dissolution, and the desire was to establish institutions that would be the most effective in achieving central banking goals. At the same time, attention turned to some alleged corporate governance problems involving central banks (Frisell et al., 2007), as well as the widely publicised governance problems in large corporations such as Enron. Many long-established central banks have been examining the methods used to achieve their objectives, and as a result, several central banks have undergone changes to their institutional frameworks, methods of implementing monetary policy, or provision of payment services, in an attempt to make them more effective.

For example, in 1989, the Reserve Bank of New Zealand was given the ability to implement monetary policy without political influence. In 1997, the Bank of England gained more independence from the government and was given responsibility for setting monetary policy to achieve the government's inflation target. Responsibility for bank supervision, which the Bank of England was given in 1987, was removed from the Bank of England's duties in 1998 (Lybek and Morris, 2004). In the US, the Federal Reserve has been increasing the degree of monetary policy transparency and communication to help promote policy effectiveness. For example, in November 2007, the Fed began providing economic projections more often and with a longer forecast horizon. There is a growing body of literature that examines what procedures central banks should follow to set monetary policy most effectively (Blinder, 2004). Moreover, in light of the transition to electronic forms of payments, US Federal Reserve Banks are rethinking the role their branches perform within the Federal Reserve System.

This environment of change has created a new interest in better understanding the roles played by organisational structures, accountability, and transparency in increasing the efficiency and effectiveness of central banks in achieving their objectives and ultimately yielding better economic outcomes. Lybek and Morris (2004) surveyed the central bank laws in 101 countries and found that while central bank autonomy (ie, independence from the government) and accountability are generally accepted as a good practice, there is less consensus regarding the structure, size, and composition of the governing bodies. Frisell et al. (2007) expanded on this topic by examining the organisational structures in a group of mostly European central banks. The authors raise an important question whether there is a trade-off between the accountability of central banks and their independence from the government in setting monetary policy.

While much has been written about the potential role that organisational structure can play in central banks, there has been little in the way of empirical study of the hypothesis that institutional form is related to performance. We provide some preliminary evidence. Our paper asks two simple questions: first, can we find a significant statistical relationship between central bank structural characteristics, including board structure and goals, and economic outcomes that reflect the performance of central banks? Second, do these relationships differ across central banks operating in countries at different stages of economic development? Thus, our study adds to the growing literature on organisational form and central bank performance in two ways. First, while much of the literature has focused on developing measures of the governance structure of central banks, we attempt to provide statistical evidence on whether measures of structural and organisational forms are significantly related to better economic outcomes. Second, while much of the literature has focused on the relatively developed countries, in this paper, we provide cross-country evidence. (1) We emphasise that our results must be viewed as suggestive rather than definitive. The relatively short time frame in our sample makes it difficult to disentangle the direction of causality: does organisational form cause good performance, or does good performance lead to particular central bank organisational characteristics? Also, our central bank structure variables may be proxying for omitted variables. Thus, our results are best interpreted as correlations. Nonetheless, we believe that some of the significant relationships we find are sufficiently interesting to warrant further investigation on the important question of whether there is a discernable relationship between central bank institutional structure and economic performance.

The rest of our paper is organised as follows. The next section discusses the responsibilities of central banks, potential methods for achieving the goals, and our hypotheses. The subsequent section discusses our data. The next section presents our empirical results. The final section concludes.

CENTRAL BANK RESPONSIBILITIES AND CORPORATE GOVERNANCE

Goals

Central banks have several responsibilities, and this multiplicity of goals raises interesting issues about how to measure performance. As the literature suggests, while the tasks assigned to particular central banks have changed over the years, their key focus remains macroeconomic stability, including stable prices (low inflation), stable exchange rates (in some countries), and fostering of maximum sustainable growth (which may or may not be explicitly listed as a goal of the central bank in enabling legislation). (2,3) Most central banks are responsible for stability of the payments and settlement system. (4) Several central banks have some responsibility for directly supervising and examining commercial banks for safety and soundness. For example, in the US, commercial bank examination is spread among three federal agencies (the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation), with the responsible agency determined by the bank's charter. Other countries, such as the UK, have removed bank supervision from the list of central bank responsibilities. Many central banks also deliver banking services to banks; these might include services related to cash, cheque, credit, and/or electronic payments (Fry et al., 1999; Flannery, 1996). According to the Frisell et al.'s survey (2007), in addition to monetary policy, the three most frequently mentioned objectives in the statutes of central banks in order are financial stability objectives, payments system objectives, and supervisory objectives.

Some central banks have an explicit mandate for achieving an output goal and a stable exchange rate. For example, according to Royal Decree, the Central Bank of Norway's monetary policy 'shall be aimed at stability in the Norwegian krone's national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment' (Royal Decree, 2001). The Reserve Bank of Australia is mandated by the Reserve Bank Act to ensure that its powers are 'exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to (a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia' (Section 10(2) of the Reserve Bank Act of 1959). Other central banks do not have an explicit mandate to stabilise output, but most are expected to run policy to avoid instability in output and to help support sustainable growth.

The multiplicity of objectives makes central banks complicated institutions. Although central banks and governments care about seigniorage income, and operating within their budgets, as public institutions, central banks are much less driven by the profit motive than are private corporations. So, market profit does not serve as the relevant performance benchmark and incentive device. Indeed, coming up with a summary performance measure that aggregates across all of the central bank's goals is difficult, given the trade-offs among the goals.

Despite these difficulties, it seems worthwhile asking whether there are ways of organising the central bank as an institution that would lead to better incentives and thereby yield better economic outcomes. This might include structuring the decision-making board in a particular way, choosing the degree of autonomy to give to central bank decision-makers, choosing the particular goals to assign to a central bank to the extent that there may be conflicts between the goals, or choosing the level of transparency of central bank decisions as a mechanism for increasing accountability.

Central bank organisational structure

A significant body of research on developed countries has examined whether a central bank's independence from the government can increase its effectiveness in achieving its monetary policy goals (eg, Alesina and Summers, 1993; Fischer, 1994; Cukierman, 2005; Maier, 2007). By independence (called 'autonomy' in some of the literature, eg, Lybek, 1999, 2002; Lybek and Morris, 2004; Hayo and Hefeker, 2007), we mean that while the government may determine the goals of the central bank, the central bank controls the implementation of monetary policy to achieve those goals without direct approval of the executive branch of government. Partly, this helps to insulate central bank decision-making from potentially conflicting goals of the government (eg, a short-run boost to growth at the expense of inflation or higher economic volatility over the longer run; inflating away the public debt, etc.). Evidence generally suggests that such independence can enhance central bank effectiveness, and the literature has found that developed countries that took steps to increase central bank independence after the 1970s experienced lower average inflation without a detriment to growth (Lybek, 1999). (5)

There appears to be significant variation in organisational structures and institutional arrangements across central banks. (6) Characteristics that vary include, among others, the size of the board, whether the structure of the board is similar to that of a corporate board with both inside (central bank staff) and outside directors, or whether it is made up of only central bank staff, the length of term, and turnover rate of the board's chair. The corporate governance literature on private corporations suggests how some, but not all, of these characteristics should relate to better governance, and in turn, to better performance. For example, the literature suggests that boards with inside and outside directors generally offer stronger governance. However, it is not clear if this is true in a central bank setting. Moreover, it is not clear, a priori, how some of the organisational characteristics might relate to performance. For example, a larger board helps to bring a diversity of views and skills to the decision-making process, which can arguably lead to better decision-making, but it also can make it more difficult to reach decisions or dilute accountability among members for the board's decisions, which could be detrimental to outcomes. Similarly, as Lybek (1999) points out, higher turnover among governors is typically interpreted as indicating less autonomy, but it might also indicate that the governor is more embedded and more susceptible to government interference. Or it might indicate a well-functioning imposition of accountability, depending on the reasons for turnover. Our empirical work investigates whether there is a significant correlation between several organisational characteristics and central bank performance as measured by tangible economic outcomes.

DATA AND MEASURES

One difficulty in implementing our cross-country study is obtaining data on a consistent set of measures across countries. We wanted to include as many countries as we could, but that meant having fewer variables describing central bank organisations. Another challenge was assessing the consistency of the data over time. Finally, we had to evaluate the quality of the data, which varies from country to country. We use data from multiple sources, including the websites of central banks; information that individual central banks provided to us upon request; Thomson's (Bureau van Dijk) Bankscope database (also known as Fitch's International Bank Database); IMF's International Financial Statistics; BIS publications of Blue Books and Orange Books; annual reports of individual central banks; World Development Indicators; the Polity IV project of the Center for International Development and Conflict Management at the University of Maryland; and La Porta et al. (1999). We did substantial editing and cross-checking to produce as clean a data set as possible.

Our data are annual data from 1996 to 2000. To ensure that enough time had elapsed since the establishment of the central banks in our sample, we included countries whose central banks were established in 1993 or earlier (which allowed us to include the countries of the former Soviet Union). Because how well central banks perform and the relationship between performance and central bank characteristics may differ across countries that vary in the degree of economic development, we classified the countries into three groups: transition economies, developing economies, and developed economies. This might also help to provide some control (admittedly weak) for direction of causality to the extent that the central banks and their characteristics are relatively newer in the transition economies than in the developed economies. (7,8) Appendix Table A1 lists the countries in our analysis.

Our basic regressions, which we estimate via ordinary least squares, are of the form:

[P.sub.it] = [[alpha].sub.0] + [[alpha].sub.1][X.sub.it] + [[alpha].sub.2] [Year.sub.1997] + [[alpha].sub.3] [Year.sub.1998] + [[alpha].sub.4] [Year.sub.1999] + [[alpha].sub.5][Year.sub.2000] + [[epsilon].sub.it]

where [P.sub.it] is a performance measure, [x.sub.it] is a vector of central bank characteristics, Year, is a dummy variable = 1 if the year is t and 0 otherwise (note we omit the 1996 variable), and [[epsilon].sub.it] is an error term. (9)

Performance measures

Since central banks have several goals, we examine several different performance measures. Appendix Table A2 gives the definitions and sources of each variable. (10) Price stability is viewed as one of the major objectives pursued by central banks. Although a price-level target rather than an inflation target has been pursued by at least one central bank in the past (Sweden in the 1930s) (Berg and Jonung, 1999), most central banks have opted for trying to control inflation and aim for low and stable inflation. Thus, we investigate the following inflation performance measures:

[Inflation.sub.it] = annual consumer price index (CPI) inflation rate in country i in year t,

Abs[(Inflation).sub.it] = absolute value of annual CPI inflation rate in country i in year t, which acknowledges that countries can miss hitting their goal of price stability via deflation as well as inflation. (11)

Inflation [variability.sub.it] = standard deviation of the inflation rate in country i over the years t-2, t-1, t. Since our regression time frame runs from 1996 to 2000, this measure incorporates annual inflation rates from 1994 and 1995, as well as from 1996 to 2000.

We also examine a measure published by the Heritage Foundation, which is a component of the Foundation's 'Economic Freedom Index'.

Heritage monetary performance [index.sub.it]=index that measures the success of a country's monetary policy based on two components: the weighted average inflation rate over the most recent 3 years and the degree to which a country imposes price controls. The index varies from 0 to 100, with lower inflation and lack of price controls yielding higher scores. A country with inflation of 10% and no price controls would have a score of 80, while a country with inflation of 2% would have a score of 91 (Beach and Kane, 2007).

We examine two output performance measures. Although in the long run, monetary policy cannot affect real variables, we are interested in examining whether certain organisational characteristics of central banks are associated with higher or lower output, as well as whether they are associated with higher or lower output volatility. Thus, we examine:

Real [growth.sub.it]=annual growth rate of real GDP in country i in year t, and, Real growth [variability.sub.it]=standard deviation of annual growth rate of real GDP in country i over the years t-2, t-1, t. (12)

Since there can be short-run trade-offs between price and output stabilisation, we wanted to examine a performance measure that would incorporate both goals. As discussed in Mester (2003), there is a long literature that looks at monetary policy reaction functions, or Taylor-type rules for monetary policy (see Taylor (1999) for a survey, and Hetzel (2000) for a critique of the Taylor-rule literature). Such a rule relates the policy instrument to targets for inflation and the output gap or the unemployment rate (ie, it relates the instrument to macroeconomic variables). It also assumes that the economic dynamics imply a trade-off between inflation and the output gap or unemployment (ie, it is based on an underlying Philips curve). According to Orphanides (2003) and Taylor (1999), Taylor's rule appears to perform well in a variety of models and appears to be robust to different model specifications.

Such a rule can be derived from a model of the economy in which the central bank's goal is to stabilise output and inflation (ie, to minimise a weighted sum of the unconditional variances of inflation and the output gap). We do not have a measure of the output gap for our countries, nor do we know the central banks' weights, but to get at this idea, we assume equal weights, and examine the performance measure:

Inflation and real growth [variability.sub.it] = 0.5. Inflation [variability.sub.it] + 0.5 Real growth [variability.sub.it.]

To get at the issue of financial stability, we examined the performance of the banking system, as given by

Problem [loans.sub.it] = problem loan volume as a percentage of total loan volume in country i in year t.

Since some central banks are given the mandate to enact policies to stabilise the value of the country's currency on international markets within an exchange rate regime chosen by the government, we also examine:

Exchange rate [variability.sub.it] = standard deviation of the exchange rate in country i within year t based on the monthly data available in International Financial Statistics published by the IMF.

Central bank characteristics

We focus on central bank characteristics that are related to organisational structure and that could potentially be correlated with the central bank's effectiveness in achieving its goals as reflected in our performance measures. Our measures, which do not vary over our sample period for the countries included in this study, are as follows:

[Independent.sub.it] = 1 if the central bank has autonomy from the government in implementing monetary policy (even if it does not necessarily have independence in setting its goals), and 0 otherwise. (13) Evidence on developed countries suggests that central bank independence yields better economic outcomes, and many of the new central banks have been organised with this in mind. We seek to see if we can find this in our data.

[Directors.sub.i] = number of directors on the central bank's board in country i, and

Outside [directors.sub.i] = percentage of outside directors on the central bank's governing board in country i.

As discussed above, the number of directors could be positively related to performance to the extent that more minds yield better decision-making, but at some point, the size could hinder decision-making by making it difficult to reach a consensus or making it difficult to achieve individual accountability. While the finance literature suggests that outside directors can monitor insiders to help achieve better outcomes, the work of the central bank can be arcane, so finding outsiders with the necessary skills and knowledge might be difficult. This might be especially true in countries that have recently adopted market economies, where the pool of experienced market economists is not large. Hence, the relationship between these variables and economic performance is a priori ambiguous.

Some of the literature, for example, Berger et al. (2001) and Cukierman et al. (1992), has examined the turnover rate of the central bank governor (or chairman of the board). High turnover may suggest less independence from the government, which might have a negative impact on central bank effectiveness, but it could also signal the exit of less effective management. Hence, its effect on performance, if any, is not a priori clear. Thus, we examine the measure:

[Turnover.sub.i] = average rate of turnover of central bank governors since 1993, measured as the total number of unserved years since 1993 as a percentage of the length of a governor's term specified by law divided by the number of governors since 1993. (14)

Similarly, the length of the governor's term might be related positively to performance if it means less government interference or negatively to performance if it means the governor is embedded in the institution and insulated from scrutiny. In some cases, there is no specified length of term for the governor. Thus, we include two variables in the analysis:

Term [unspecified.sub.i] = 1 if the length of the governor's term in country i is unspecified and 0 otherwise, and,

Term [length.sub.i] = 0 if the governor's term is unspecified and number of years in the governor's term in country i otherwise.

Finally, central banks vary according to whether they have banking supervisory responsibilities along with monetary policy. Indeed, a number of central banks have been reconsidering whether bank supervision and monetary policy create potential conflicts of interest or whether there are synergies between the two (Bhattacharya et al., 1998). To examine this issue, we include an indicator variable:

[Supervision.sub.i] = 1 if the central bank has bank supervisory responsibilities as well as monetary policy responsibilities and 0 otherwise.

STATISTICAL RESULTS

Difference-in-means tests

Table 1 presents difference-in-means tests for the variables across country group: transitional economies, developing economies, and developed countries. One might expect that there would be more similarities between the transition and developing countries in terms of economic performance than between the transition and developed countries. It is not clear that that would necessarily be true of the central bank organisational characteristics to the extent that transition countries might look to the more established banks in developed countries as role models.

As shown in the table, many of the performance variables and central bank characteristics are significantly different across the country groups in our sample. In particular, transition economies have significantly higher levels and variability of inflation than developing or developed countries. The average inflation rate for transition economies in our sample was 20% compared with 10% for developing economies and slightly above 2% for developed countries. In contrast, there is no significant difference across the three groups in terms of annual real GDP growth, which averages about 3.5%-3.75%. But there is a significant difference in variability, with the transition economies experiencing the most volatile and the developed countries experiencing the least volatile output growth. Transition countries experience a higher percentage of problem loans than the other countries, but still a relatively low 6.6% of total loans. These measures suggest that transition economies experienced a more volatile economic environment during the second half of the 1990s, the time period of study, than did other economies.

In terms of organisational characteristics, central banks do seem to differ across the country groups. In particular, there is a higher level of central bank independence from the executive branch of government in transition and developed countries than in developing countries (21% and 78% of the central banks in the transition and developed countries, respectively, are independent versus about 8% in developing countries). This is probably not that surprising, since independence is thought to be a best practice among central banks. Several of the central banks in the developed world have sought more independence, while the new central banks in the transition countries organised themselves with high degrees of independence from the beginning.

There is little difference in the average size of boards across the country groups (although the differences are statistically significant), with average size ranging from 8 to 10 members. Developed countries tend to have a higher percentage of outside directors on their boards (27%) versus transition and developed countries (14%-17%). For those countries that specify a definite term for their central banks governor, the average terms are quite similar across country groups, varying between about 6 years in transition countries, 4 years in developing countries, and 5 years in developed countries. The average turnover rate of governors since 1993 is quite low in all three country groups, but lowest in the developed countries.

In terms of whether the central bank has responsibility for commercial bank supervision as well as monetary policy, it appears that fewer than half have joint responsibility in all three country groups. There is no significant difference between transition and developed countries, where about 40% of the central banks have responsibility for both of these tasks. In developing countries, the fraction is significantly lower at 30%. Finally, although we do not use age as an independent regressor, central banks in developed countries are, on average, quite a bit older than those in transition or developing countries--not at all a surprise.

The differences in performance measures and central bank governance characteristics across the country groups in our sample suggest that there could be significant differences in the relationship between our central bank institutional variables and performance, if indeed, such a relationship can be uncovered in the data at all.

Regression analysis

Table 2 presents the regression results. First, notice that there do appear to be some significant associations between performance and governance characteristics of central banks. But, on the whole, it would be difficult to reach a definitive conclusion that central bank organisational characteristics have strong correlations with economic performance, either positively or negatively. Second, notice that the regression coefficients do appear to differ across the three country groups.

We tested the null hypotheses of equal coefficients across the country groups. We could not reject, at standard significance levels, the null hypothesis of equal coefficients for the problem loans and the exchange rate variability performance measures. However, for the other performance measures, we reject the null hypothesis of equal coefficients in all cases for the transition countries relative to the developing or developed countries. We also reject the null hypothesis of equal coefficients across developing and developed countries for the performance measures involving inflation. Given these results, we proceeded by examining the results of the regressions that were estimated separately for each country group. As a robustness test, we also investigated two other groupings of our countries.

Inflation performance

As shown in Table 2, with regard to inflation and inflation variability, larger boards are associated with higher and more variable inflation for developed countries, but there is an insignificant association for transition and developing countries. Longer governor terms or those with indeterminate length are associated with lower inflation in transition and developing countries. These longer terms might imply that the governor is less subject to government intervention, which might produce better inflation results. However, when we look at the independence of the central bank, we find a significant negative association with inflation only for the transition economies. We find a significantly positive association for developing and developed economies (ie, central bank independence is associated with worse inflation performance in these countries), which is contrary to the received wisdom. We did not find a significant relationship between independence and inflation variability.

We find some evidence that having the central bank involved in both bank supervision and monetary policy is associated with worse inflation outcomes in terms of level and variability, since the coefficient on supervision is significant for developed countries in both of these inflation regressions.

The results for the Heritage Foundation's monetary performance index, reported on the last part of Table 2, are quite similar to those for inflation, although the significance levels are higher. (15) This is not too surprising given that the measure is based on inflation rates (and whether the country uses price controls). (Recall that higher inflation levels are associated with lower levels of the index.)

Output performance

In terms of output, we find only marginally significant associations between output level and central bank organisational characteristics. For output performance, perhaps the better measure is variability, since central banks have little influence on the level of output in the longer run. Here, we find little association between the size of the board, percentage of outside directors, governor term, or governor turnover and performance. We do find that central bank independence seems to result in lower output variability. This result is the opposite of what one might expect if there is a short-run trade-off between inflation and output variability and the government favours stabilising output rather than inflation. Instead, our results suggest that independent central banks do not act in a way that neglects output stabilisation.

We find some evidence that independence is negatively associated with overall variability, as measured by the equally weighted sum of inflation variability and real growth variability--significantly so in developed countries, with the negative association with output variability dominating the positive association with inflation variability.

Other performance measures

We find little association between the health of the commercial banking system as measured by the percentage of problem loans in a country and the central bank organisational characteristics. There is a slight negative relationship between the percentage of outside directors on the central bank's governing board and problem loans. However, we do not want to read much into this. The regression adjusted [R.sup.2]'s are very low, and even negative, for the developed countries regression.

For exchange rate variability, the most significant associations are found in the transition economies. This is perhaps not surprising, given that stabilisation of exchange rates is more likely to be an important goal of central banks in these countries compared with those in developed countries. In transition economies, central banks with larger boards, fewer outside directors, and longer governor terms have higher variability. But higher turnover among the governors and more central bank independence are associated with more stable exchange rates.

We need to be cautious in interpreting our results, remembering that we have a relatively short time frame in our sample. The lack of strong significance could merely reflect the lack of a long enough time frame over which there has been enough variation in economic outcomes. We also emphasise that these are correlations. Our results do not permit interpretations of causality. Our regressions are quite sparse, including central bank characteristics but not other potential determinants of economic performance. The regressions may be picking up spurious correlations if central bank characteristics are correlated with omitted variables or are proxying for country-specific determinants of performance. Nonetheless, the relationships we do find differ across country groups and some of the significant associations between performance and central bank characteristics are sufficiently surprising to merit further exploration.

Alternative specifications (16)

(1) We investigated whether countries that implement monetary policy via inflation targeting have better outcomes than those that do not use inflation targeting. First, we entered a dummy variable indicator of inflation targeting into the regressions. Second, we estimated separate regressions for the inflation-targeting and non-inflation-targeting countries, by country group. Our results suggest that in most cases, inflation targeting does not appear to have a significant relationship to performance outcomes or to change results reported in Table 2 in any significant way. When inflation targeting is significant, it is more often significant for the developing country group, and interestingly, its correlation is with worse, not better performance (higher inflation and inflation variability, lower output growth, and higher output variability). This might be evidence of reverse causality--countries that have had poor outcomes may have implemented inflation targeting.

(2) We investigated whether significant correlations would survive if instead of dividing our countries into groups according to the degree of economic development, we used some other typology. We investigated two. First, we used data from the Polity IV project of the Center for International Development and Conflict Management at the University of Maryland to divide countries into groupings based on the degree to which their governments are more democratic and less autocratic. The polity score, which was available for 87 of our countries, ranges from--10 (strongly autocratic) to + 10 (strongly democratic). We divided countries into three groups based on the country's average polity score from 1996 to 2000. There were 19 countries in the least democratic group (which we defined as average polity score <0); 40 countries in the middle group (with average polity score from 0 to 9); and 28 countries in the most democratic group (with average policy score = 10).

We find that at least some central bank characteristics remain significantly related to economic performance in each of the polity country groupings. Which particular variables are significant differs by performance measure, as it did in the regressions based on country groups categorised by level of economic development. There is no particular polity group that exhibits a stronger relationship between central bank characteristics and performance than another polity group; it depends on performance measure.

Our second typology was based on the origin of the country's legal system. A large body of work has found that a country's legal origin is correlated with economic and financial development (see La Porta et al., forthcoming). For a large set of countries, La Porta et al. (1999) provide information on whether the origin of the country's legal system is German, Scandinavian, British (ie, common law), or Socialistic. Since La Porta, Lopez-de-Silanes, Shleifer, and Vishny find that governments in countries with French or Socialistic legal origins performed worse than those with British legal origins, we grouped our countries into three groups: those with German or Scandinavian legal origins (11 countries), those with French or Socialistic legal origins (53 countries), and those with British legal origins (32 countries).

Again, we find that some central bank characteristics remain significant in each of the country groups categorised by legal origins. (17) Thus, our general conclusion from this investigation of alternative country groupings is that the significant relationships we found between central bank characteristics and performance for countries grouped by level of economic development were not driven by the country grouping per se.

CONCLUSIONS

Over the last decade, the legal and institutional frameworks governing central banks and financial market regulatory authorities throughout the world have undergone significant changes. As new central banks have arisen in the aftermath of the Soviet Union's dissolution, as corporate governance problems have surfaced in some central banks, as central banks have had to rethink some of their operations in the wake of changing payments technologies, and as more is learned about effective implementation of monetary policy, the organisational structure of central banks has become an area of research interest. There is a new interest in better understanding the roles played by organisational structures, accountability, and transparency in increasing the efficiency and effectiveness of central banks in achieving their objectives and ultimately yielding better economic outcomes.

Although much has been written pointing out the potential role that institutional form can play in central banks, little empirical work has been done to investigate this hypothesis. To fill this void, our paper asks two simple questions: first, can we find a significant statistical relationship between central bank institutional characteristics and economic outcomes that reflect the performance of central banks? Second, do these relationships differ across central banks operating in countries at different stages of economic development?

In answer to our first question, our findings suggest that there are some significant associations, but that there is no definitive conclusion that central bank organisational structure has strong correlations with economic performance, either positively or negatively. For example, we did not find a strong correlation between the size of the board and the percentage of outside directors on the board with performance. Moreover, in some cases, the associations are not the expected ones. For example, we find that the central bank's independence from the executive branch of the government is not always significantly related to performance and in some cases the relationship is the opposite of what one might expect. In developed countries, while independence is significantly associated with lower output variation and with lower weighted price and output variation, we find a positive association between independence and inflation. We also find this positive association for developing countries, while we find a significant negative relationship for the set of transition countries.

In answer to our second question, we do find that the relationship between performance and central bank organisational characteristics differs across countries at different stages of economic development.

We need to be cautious in interpreting our results, remembering that we have a relatively short time frame in our sample. The associations should be interpreted as correlations and not causation. The lack of strong significance could merely reflect the lack of a sufficiently long time frame over which there has been enough variation in economic outcomes. Or, our results could provide an explanation of Lybek and Morris's (2004) finding that there is little consensus among central banks regarding the structure, size, and composition of their governing bodies. Nonetheless, several of the associations we find are sufficiently surprising as to merit future exploration.

Acknowledgements

We thank the editor, an anonymous referee, participants at the 13th Dubrovnik Economic Conference at the Croatian National Bank, and participants at the Frontiers in Central Banking Conference at the Hungarian National Bank for helpful comments. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Philadelphia, the Board of Governors of the Federal Reserve System, or the Bank of Finland.

APPENDIX

See Tables A1 and A2.

Table A1: Countries included in the empirical work (a)

Transition economies: Albania, Armenia, Belarus, China, Croatia,
Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Latvia,
Lithuania, Moldova, Mongolia, Poland, Russia, Slovakia, Slovenia,
Ukraine

Developing economies: Argentina, Aruba, Bahamas, Bahrain, Barbados,
Belize, Botswana, Brazil, Chile, Colombia, Costa Rica, Dominican
Republic, Ecuador, Egypt, El Salvador, Ethiopia, Fiji, Guatemala,
Haiti, India, Indonesia, Jordan, Kenya, Kuwait, Lebanon, Lesotho,
Macau, Malawi, Malta, Mexico, Morocco, Mozambique, Nepal,
Nicaragua, Nigeria, Oman, Pakistan, Peru, Philippines, Saudi
Arabia, Sierra Leone, South Africa, Sri Lanka, Taiwan, Tanzania,
Trinidad and Tobago, Turkey, Uganda, United Arab Emirates, Uruguay,
Zambia, Zimbabwe

Developed economies: Australia, Austria, Belgium, Canada, Cyprus,
Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland,
Ireland, Israel, Italy, Japan, Korea, Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United
Kingdom, United States

(a) These countries were included in at Least one of the
regressions reported in Table 2.

Table A2: Variable definitions

Variable name Definition

Performance measures
 Inflation Annual CPI inflation rate
 Abs(Inflation) Absolute value of the annual CPI
 inflation rate
 Inflation squared Annual CPI inflation rate squared
 Inflation variability Standard deviation of annual CPI
 inflation rate over the previous 3
 years
 Heritage monetary index An index measuring the success of the
 country's monetary policy based on the
 weighted average inflation over the
 most recent three years and the degree
 to which a country imposes price
 controls, as determined by the Heritage
 Foundation as part of its Index of
 Economic Freedom
 Real growth Annual growth rate of real GDP
 Real growth variability Standard deviation of annual real GDP
 growth over the previous 3 years
 Inflation and real growth An equally weighted average of the
 variability standard deviation of annual CPI
 inflation over the previous 3 years
 and the standard deviation of annual
 GDP growth over the previous 3 years
 Problem loans Problem loan ratio=dollar volume of
 problem loans as a percent of dollar
 volume of total loans
 Exchange rate variability Standard deviation of the exchange
 rate from monthly data

Characteristics of the central bank
 Directors Number of directors on the central
 bank's board
 Outside directors Number of outside members on the board
 as a percent of total number of
 directors on the board
 Term unspecified Indicator variable=1 if no definite
 term of the central bank's governor
 (ie, chairman of the board) is
 specified by law; 0 otherwise
 Term length If a definite term of the central
 bank's governor is specified by the
 law, the number of years in a full
 term; 0 otherwise
 Turnover Turnover of governor=Average rate of
 turnover of central bank governors
 since 1993, measured as number of
 unserved years as percentage of term
 of the governor divided by total
 number of governors since 1993
 Independent Dummy variable = l if the central bank
 is not part of the Ministry of Finance
 and can implement monetary policy
 without the direct approval of the
 government, and 0 otherwise.
 Supervision Dummy variable = l if the central bank
 is involved in bank supervision as
 well as monetary policy, and = 0
 otherwise
 Age The number of years since the founding
 of the central bank
 Inflation target Dummy variable = 1 if central bank
 implements monetary policy by setting
 a numerical inflation target and = 0
 otherwise

Variable name Data source

Performance measures
 Inflation Calculation based on World Development
 Indicators (WDI) 2005 Data Disk
 Abs(Inflation) Calculation based on World Development
 Indicators (WDI)
 Inflation squared Calculation based on WDI 2005 Data Disk
 Inflation variability Calculation based on WDI 2005 Data Disk
 Heritage monetary index Heritage Foundation Website
 Real growth WDI 2005 Data Disk
 Real growth variability Calculation based on WDI 2005 Data Disk
 Inflation and real growth Calculation based on WDI 2005 Data Disk
 variability
 Problem loans Bankscope database
 Exchange rate variability IMF International Financial Statistics
 (IFS)

Characteristics of the central bank
 Directors Calculation based on IMF IFS
 Outside directors Calculation based on IMF IFS

 Term unspecified Morgan Stanley Central Bank Directory,
 Individual Central Bank Websites, and
 E-mails
 Term length Morgan Stanley Central Bank Directory,
 Individual Central Bank Websites, and
 E-mails
 Turnover Morgan Stanley Central Bank Directory,
 Individual Central Bank Websites, and
 Direct Correspondence via E-mail with
 the Central Banks
 Independent Central Bank Websites, Other research
 papers: Cukierman (1994), Cukierman et
 at. (1992), Cukierman and Webb (1995),
 de Haan and Kooi (2000), de Haan and
 Van't Hag (1995), Loungani and Sheets
 (1997), Mangano (1998), and the
 European Bank for Reconstruction and
 Development (EBRD) sources
 Supervision Websites, other research papers (see
 list for the variable INDEPENDENT),
 and EBRD sources
 Age Morgan Stanley Central Bank Directory,
 Individual Central Bank Websites, and
 Direct Correspondence via E-mail with
 the Central Banks
 Inflation target Websites, Other Research Papers (see
 list for the variable INDEPENDENT),
 and EBRD sources

Variable name Year

Performance measures
 Inflation 1996-2000
 Abs(Inflation) 1996-2000
 Inflation squared 1996-2000
 Inflation variability 1996-2000
 Heritage monetary index 1996-2000
 Real growth 1996-2000
 Real growth variability 1996-2000
 Inflation and real growth 1996-2000
 variability
 Problem loans 1996-2000
 Exchange rate variability 1996-2000

Characteristics of the central bank
 Directors 1996-2000
 Outside directors 1996-2000
 Term unspecified 1996-2000
 Term length 1996-2000
 Turnover 1996-2000
 Independent 1996-2000
 Supervision 1996-2000
 Age 1996-2000
 Inflation target 1996-2000

REFERENCES

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Barth, JR, Caprio, G and Levine, R. (forthcoming): Bank regulation is changing: But for better or worse? Comparative Economic Studies.

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Berger, H, de Haan, J and Eijffinger, S. 2001: Central bank independence: An update of theory and evidence. Journal of Economic Surveys 15(1): 3-40.

Bhattacharya, S, Boot, A and Thakor, AV. 1998: The economics of bank regulation. Journal of Money, Credit and Banking 30(4): 745-770.

Blinder, AS. 2004: The quiet revolution: Central banking goes modern. Yale University Press: New Haven, CT.

Caprio Jr., G and Vittas, D. 1995: Financial history: Lessons of the past for reformers of the present. Policy research working paper series, no. 1535.

Cukierman, A. 1994: Commitment through delegation, political influence and central bank independence. In: de Beaufort Wijnholds, JO, Eijffinger, SCW and Hoogduin, LH (eds). A Framework for Monetary Stability, Financial and Monetary Studies. Kluwer Academic Publisher: Boston.

Cukierman, A. 2005: Central bank independence and monetary policymaking institutions--past, present and future. Distinguished Lecture Delivered at the Annual Meeting of the Chilean Economic Society, Tel Aviv University, September.

Cukierman, A and Webb, SB. 1995: Political influence on the central bank: International evidence. The World Bank Economic Review 9(3): 397-423.

Cukierman, A, Webb, SB and Neyapti, B. 1992: Measuring the independence of central banks and its effect on policy outcomes. The World Bank Economic Review 6(3): 353-398.

de Haan, J and Kooi, WJ. 2000: Does central bank independence really matter? New evidence for developing countries using a new indicator. Journal of Banking & Finance 24: 643-664.

de Haan, J and Van't Hag, GJ. 1995: Variation in central bank independence across countries: Some provisional empirical evidence. Public Choice 85: 331-351.

Eijffinger, SCW and Geraats, PM. 2002: How transparent are central banks? CEPR discussion paper 3188.

Fischer, S. 1994: Modern central banking. In: Capie, F, Goodhart, C and Fischer, S (eds). The Future of Central Banking: The Tercentenary Symposium of the Bank of England, Chapter 2, Cambridge University Press: Cambridge, UK.

Flannery, M. 1996: Financial crises, payment system problems, and discount window lending. Journal of Money, Credit and Banking 28(4): 273-305.

Frisell, L, Roszbach, K and Spagnolo, G. 2007: Governing the governors: A clinical study of central banks. Working paper, Riksbank.

Fry, MJ, Kilato, I, Roger, S, Senderowicz, K, Shepard, D, Soils, F and Trundle, J. 1999: Payment systems in global perspective. Routledge: New York.

Hayo, B and Hefeker, C. 2007: Does central bank independence cause low inflation? A skeptical view. Working paper presented at the Central Bank of Hungary, May 2007.

Healey, J. 2001: Financial stability and the central bank: International evidence. In: Brealey, RA, Clark, A, Goodhart, C, Healey, J, Hoggarth, G, Llewellyn, DT, Shu, C, Sinclair, P and Soussa, F (eds). Financial Stability and Central Banks: A Global Perspective. Routledge: New York.

Hetzel, RL. 2000: The Taylor rule: Is it a useful guide to understanding monetary policy? Federal Reserve Bank of Richmond 86: 1-33.

Hupkes, E, Quintyn, M and Taylor, MW. 2006: Accountability arrangements for financial sector regulators. IMF Economic Issues 39, Washington, DC.

La Porta, R, Lopez-de-Silanes, F and Shleifer, A. (forthcoming): The economic consequences of legal origins. Journal of Economic Literature.

La Porta, R, Lopez-de-Silanes, F, Shleifer, A and Vishny, R. 1999: The quality of government. Journal of Law, Economics, and Organization 15: 222-279.

Loungani, P and Sheets, N. 1997: Central bank independence, inflation, and growth in transition economics. Journal of Money, Credit and Banking 29(3): 381-399.

Lybek, T. 1999: Central bank autonomy, and inflation and output performance in the Baltic States, Russia, and other countries of the former Soviet Union, 1995-97. IMF working paper 99/4, International Monetary Fund: Washington. Also published in Russian and East European Finance and Trade 35(6): 7-44.

Lybek, T. 2002: Central bank autonomy, accountability, and governance: Conceptual framework. Paper presented at the 2002 IMF Seminar on Current Developments in Monetary and Financial Law, Washington, DC.

Lybek, T and Morris, J. 2004: Central bank governance: A survey of boards and management. IMF working paper no. 04/226.

Maier, P. 2007: Monetary policy committees in action: Is there any room for improvement? Working paper presented at the Central Bank of Hungary, May 2007.

Mangano, G. 1998: Measuring central bank independence: A tale of subjectivity and of its consequences. Oxford Economic Papers 50: 468-492.

McNamara, KR. 2002: Rational fictions: Central bank independence and the social logic of delegation. West European Politics 25(1): 47-76.

Mester, LJ. 2003: Applying efficiency measurement techniques to central banks. Federal Reserve Bank of Philadelphia working paper no. 03-13, July.

Orphanides, A. 2003: Monetary policy evaluation with noisy information. Journal of Monetary Economics 50(April): 605-631.

Royal Decree. (2001): Norway, 29 March 2001, http://www.norges-bank.no/english/nb/legislation/.

Sibert, A. 2003: Monetary policy committees: Individuals and collective reputations. Review of Economic Studies 70(July): 649 665.

Taylor, JB. 1999: The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank. Journal of Monetary Economics 43: 655-679.

Tuladhar, A. 2005: Governance structures and decision-making roles in inflation-targeting central banks. IMF working paper no. 05/183.

IFTEKHAR HASAN [1,2] & LORETTA J MESTER [3,4]

[1] Rensselaer Polytechnic Institute, 110 8th Street, Pittsburgh Building, Troy, NY 12180, USA. E-mail: hasan@rpi.edu

[2] Bank of Finland, Helsinki, Finland

[3] Research Department, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574, USA. E-mail: Loretta.Mester@phil.frb.org

[4] Finance Department, The Wharton School, University of Pennsylvania, PA 19104, USA

(1) Our paper is related to Lybek (1999), which examines central bank autonomy, inflation, and economic growth in countries of the former Soviet Union. He was unable to do much in the way of statistical testing because not enough time had passed since the establishment of these new central banks.

(2) See, for example, Tuladhar (2005), Sibert (2003), Lybek (2002), McNamara (2002), Healey (2001), Amtenbrink (1999), Maier (2007), and Caprio and Vittas (1995).

(3) Although monetary policy can affect only prices in the long run and cannot create output, price stability is a necessary condition for the economy to reach its full growth potential. In the US, the Federal Reserve Act specifies three goals for Fed monetary policy: maximum employment, stable prices, and moderate long-term interest rates. Achievement of the third goal is expected to follow if the first two goals are achieved; hence, the Fed is usually spoken of as having a dual mandate. Other central banks, for example, Japan and New Zealand, have price stability as the sole goal of monetary policy.

(4) In their survey of 25 mostly European central banks, Frisell et al. (2007) found that 80% list formulation and implementation of monetary policy as a major responsibility, and 75% list oversight and regulation of the payments and settlement system; see also Barth et al. (forthcoming) and Healey (2001).

(5) One of the earliest to do so was the Reserve Bank of New Zealand, which until 1989 was under the operational control of the Minister of Finance and since then has been independent. While there has been a trend toward greater independence, the degree of independence varies among central banks. For example, in the US, the Federal Reserve's goals are delineated by the US. Congress in the Federal Reserve Act. The UK's inflation target is set by the Chancellor of the Exchequer. In contrast, the Riksbank and the Reserve Bank of Australia set their own inflation targets.

(6) Tuladhar (2005) surveyed the differences in governing bodies of countries that have adopted inflation targeting to implement monetary policy. Eijffinger and Geraats (2002} and Frisell et al. (2007) surveyed differences in the institutional structures of the central banks in several, mainly European, countries.

(7) The direction of causality could be better identified if we had time series data on central bank characteristics and those central bank characteristics varied over time. Unfortunately, such data were not available.

(8) Results for statistical tests of equality of the set of coefficients across the country groups are discussed below. We also discuss two robustness tests that use alternative groupings of countries.

(9) Note we also ran the regressions including a quadratic time trend (ie, trend and trend-squared variables) instead of the set of time dummy variables, with virtually no difference in results in terms of coefficient magnitudes or levels of significance.

(10) In contrast to the performance measures based on economic outcomes that we use here, Hupkes et al. (2006) discuss process-based performance criteria for financial supervisors.

(11) Results using inflation squared to measure inflation performance differ little from the results using the absolute value of inflation.

(12) We note Lybek's (1999) caution that there are measurement issues with the use of GDP as a measure of output in transition economies before privatisation was complete. He suggests that the GDP numbers may have exaggerated real output prior to privatisation and understated it after because of economic agents' desire to evade taxes.

(13) We drew on several sources for this variable including Cukierman (1994), Cukierman et al. (1992), Cukierman and Webb (1995), de Haan and Kooi (2000), de Haan and Van't Hag (1995), Loungani and Sheets (1997), Mangano (1998), and the European Bank for Reconstruction and Development.

(14) In calculating this variable for countries that do not specify a term length, we assume the term length is 10 years, which is longer than the term length for any country in our sample that specifies a term length.

(15) The adjusted [R.sup.2]'s for transition and developed countries are higher in the regressions using the Heritage monetary performance index than in the regressions using inflation as the performance measure.

(16) These results are available from the authors upon request.

(17) In the grouping of countries with German and Scandinavian legal origins, the supervision variable, indicating whether the central bank was involved in bank supervision as well as monetary policy, had to be excluded from the regressions since these roles are separated in these countries.

Table 1: Difference-in-means tests across country groups

Variable name Mean

Country group [right arrow] Transition
 countries
 (1)

Inflation 20.01 **, ([dagger][dagger]
 [dagger])
 (36.70)
Abs(Inflation) 20.08 **, ([dagger][dagger]
 [dagger])
 (36.67)
Inflation variability 78.42 **, ([dagger][dagger])
 (326.84)
Heritage monetary performance 49.49 ***, ([dagger][dagger]
 index [dagger])
 (27.01)
Real growth 3.77
 (4.37)
Real growth variability 3.51 **, ([dagger][dagger]
 [dagger])
 (3.41)
Inflation and real growth 40.97 **, ([dagger][dagger]
 variability (163.53)
Problem loans 6.58 **, ([dagger][dagger]
 [dagger])
 (5.62)
Exchange rate variability 7.10
 (9.27)
Directors 8.22 ***, ([dagger][dagger])
 (2.62)
Outside directors (%) 14.15 ***
 (19.98)
Term unspecified 0.052
 (0.22)
Term length 5.58 ***, ([dagger][dagger]
 [dagger])
 (1.57)
Turnover 0.292 ([dagger][dagger][dagger])
 (0.21)
Independent 0.211 ***, ([dagger][dagger]
 [dagger])
 (0.41)
Supervision 0.421 **
 (0.50)
Age 30.63 ***, ([dagger][dagger]
 [dagger])
 (30.92)

Variable name Mean

Country group [right arrow] Developing
 countries
 (2)

Inflation 10.33 ([double dagger][double
 dagger][double dagger])
 (15.54)
Abs(Inflation) 10.52 ([double dagger][double
 dagger][double dagger])
 (15.41)
Inflation variability 9.68 ([double dagger])
 (75.84)
Heritage monetary performance 69.85 ([double dagger][double
 index dagger][double dagger])
 (14.55)
Real growth 3.56
 (3.64)
Real growth variability 2.64 ([double dagger][double
 dagger][double dagger])
 (2.38)
Inflation and real growth 6.28 ([double dagger] [double
 variability dagger])
 (39.18)
Problem loans 5.25 ([double dagger][double
 dagger][double dagger])
 (5.23)
Exchange rate variability 34.51 ([double dagger][double
 dagger])
 (231.31)
Directors 7.13 ([double dagger][double
 dagger][double dagger])
 (2.66)
Outside directors (%) 27.17 ([double dagger][double
 dagger][double dagger])
 (29.63)
Term unspecified 0.096
 (0.30)
Term length 3.94 ([double dagger][double
 dagger][double dagger])
 (1.70)
Turnover 0.288 ([double dagger][double
 dagger][double dagger])
 (0.21)
Independent 0.077 ([double dagger][double
 dagger][double dagger])
 (0.27)
Supervision 0.31 ([double dagger][double
 dagger])
 (0.46)
Age 44.46 ([double dagger][double
 dagger][double dagger])
 (25.21)

Variable name Mean

Country group [right arrow] Developed
 countries
 (3)

Inflation 2.19
 (1.97)
Abs(Inflation) 2.33
 (1.80)
Inflation variability 0.88
 (0.77)
Heritage monetary performance 83.80
 index (4.93)
Real growth 3.59
 (2.39)
Real growth variability 1.27
 (1.30)
Inflation and real growth 1.05
 variability (0.85)
Problem loans 3.82
 (4.39)
Exchange rate variability 5.13
 (14.51)
Directors 9.48
 (4.87)
Outside directors (%) 16.63
 (25.75)
Term unspecified 0.111
 (0.32)
Term length 5.07
 (2.04)
Turnover 0.15
 (0.09)
Independent 0.777
 (0.42)
Supervision 0.41
 (0.49)
Age 119.55
 (81.05)

Note: Standard deviation is in parenthesis.

*, **, *** denote transition country mean significantly different from
developing country mean at the 10%, 5%, 1% levels, respectively.

([dagger]), ([dagger][dagger]), ([dagger][dagger][dagger]) denote
transition country mean significantly different from developed country
mean at the 10%, 5%, 1% levels, respectively.

([double dagger]), ([double dagger][double dagger]),
([double dagger][double dagger][double dagger]) denote developing
country mean significantly different from developed country mean at
the 10%, 5%,1% levels, respectively.

Table 2: Regression results: associations between central bank
performance and central bank governance characteristics

 Dependent variable

 Inflation

Country group [right arrow] Transition Developing Developed
Independent variable 1 2 3
Intercept 88.87 ** 14.20 ** 1.51
Directors 0.89 -0.051 0.095 **
Outside directors 0.29 0.016 0.00019
Term unspecified -81.61 ** -13.23 ** -0.7
Term length -11.88 ** 0.00 -0.24
Turnover -20.16 -3.59 2.65
Independent -19.50 * 24.27 *** 1.02 **
Supervision 16.52 ** 0.53 1.04 ***
[Year.sub.l997] -10.60 -4.15 -0.36
[Year.sub.l998] -13.77 -2.63 -0.82
[Year.sub.l999] 1.18 -4.18 -1.46
[Year.sub.2000] -9.68 -4.94 * -0.33

N 95 240 130
F-statistic 1.79 * 4.56 *** 2.94 ***
Adjusted [R.sup.2] 0.0846 0.1407 0.1419

 Dependent variable

 Inflation variability

Country group [right arrow] Transition Developing Developed
Independent variable 4 5 6
Intercept 649.23 ** 55.56 * -0.028
Directors -20.28 0.67 0.034 **
Outside directors 7.56 *** 0.029 0.00
Term unspecified -264.98 -36.81 0.46
Term length -51.76 -6.45 -0.054
Turnover 75.01 -25.07 2.80 ***
Independent -116.20 5.01 0.036
Supervision 40.23 11.86 0.45 ***
[Year.sub.l997] -249.07 ** -23.27 0.015
[Year.sub.l998] -292.58 *** -23.71 0.083
[Year.sub.l999] -284.41 *** -24.26 0.19
[Year.sub.2000] -287.26 *** -24.15 0.50 ***

N 95 240 130
F-statistic 2.93 *** 0.92 4.60 ***
Adjusted [R.sup.2] 0.1839 -0.0036 0.2351

 Dependent variable

 Abs(Inflation)

Country group [right arrow] Transition Developing Developed
Independent variable 7 8 9
Intercept 88.97 ** 13.87 ** 1.51
Directors 0.87 -0.025 0.11 ***
Outside directors 0.29 0.019 -0.0036
Term unspecified -80.75 ** -12.41 ** 0.27
Term length -11.90 ** 0.041 -0.24
Turnover -20.02 -3.73 3.20 *
Independent -19.52 * 24.01 *** 0.54
Supervision 16.52 ** 0.84 1.388 ***
[Year.sub.l997] -10.6 -4.37 -0.36
[Year.sub.l998] -13.68 -2.68 -0.79 *
[Year.sub.l999] 1.34 -4.09 -1.12 ***
[Year.sub.2000] -9.59 -4.97 * 0.0084

N 95 240 130
F-statistic 1.78 * 4.41 *** 5.35 ***
Adjusted [R.sup.2] 0.0838 0.1357 0.2706

 Dependent variable

 Real growth

Country group [right arrow] Transition Developing Developed
Independent variable 1 2 3
Intercept 13.61 *** 4.97 *** -2.20
Directors -0.79 *** 0.16 * 0.13 **
Outside directors 0.053 * 0.0086 -0.0048
Term unspecified -0.95 -0.77 3.88 ***
Term length -1.15 * -0.21 0.50 **
Turnover 6.29 * -1.06 8.18 **
Independent -0.43 0.059 -0.035
Supervision 0.10 -0.75 0.44
[Year.sub.l997] 1.06 -0.99 0.59
[Year.sub.l998] 0.079 -2.24 *** -0.20
[Year.sub.l999] -0.38 -2.49 *** 0.18
[Year.sub.2000] 2.04 -0.76 1.15 *

N 95 245 130
F-statistic 1.72 * 2.45 *** 2.21 **
Adjusted [R.sup.2] 0.0775 0.0614 0.0934

 Dependent variable

 Real growth variability

Country group [right arrow] Transition Developing Developed
Independent variable 4 5 6
Intercept -0.23 2.30 ** 4.18 ***
Directors 0.39 * -0.088 -0.039
Outside directors -0.055 ** 0.0036 0.00028
Term unspecified -0.52 1.70 ** -1.15
Term length 0.66 0.13 -0.30 **
Turnover -1.81 1.52 ** -0.72
Independent -2.72 *** -0.39 -1.24 ***
Supervision 0.0089 0.34 0.24
[Year.sub.l997] -0.55 -0.37 -0.11
[Year.sub.l998] -1.72 * -0.43 0.19
[Year.sub.l999] -1.54 -0.51 0.11
[Year.sub.2000] -2.08 ** -0.39 0.24

N 95 245 130
F-statistic 3.01 *** 1.41 3.47 ***
Adjusted [R.sup.2] 0.1906 0.0180 0.1740

 Dependent variable

 Inflation and real growth variability

Country group [right arrow] Transition Developing Developed
Independent variable 7 8 9
Intercept 324.50 ** 28.88 * 2.55 ***
Directors -9.95 0.36 -0.017
Outside directors 3.75 *** 0.015 0.0011
Term unspecified -132.75 -17.87 -0.40
Term length -25.55 -3.06 -0.16 **
Turnover 36.60 -11.95 -0.41
Independent -59.46 1.22 -0.86 ***
Supervision 20.12 6.18 0.36 **
[Year.sub.l997] -124.81 ** -12.79 -0.059
[Year.sub.l998] -147.15 *** -13.07 0.12
[Year.sub.l999] -142.98 *** -13.10 0.12
[Year.sub.2000] -144.67 *** -13.13 0.30

N 95 225 125
F-statistic 2.93 *** 0.87 4.62 ***
Adjusted [R.sup.2] 0.1844 -0.006 0.2429

 Dependent variable

 Heritage monetary performance index

Country group [right arrow] Transition Developing Developed
Independent variable 1 2 3
Intercept 51.92 *** 53.43 *** 82.53 ***
Directors -3.65 *** 0.30 -0.17 *
Outside directors -0.10 -0.014 0.039 **
Term unspecified 19.84 22.27 *** 2.89
Term length -1.9 2.06 ** 0.38
Turnover 29.15 ** 4.61 -9.75 **
Independent 26.59 *** -10.88 *** 3.01 ***
Supervision 4.29 2.02 -4.85 ***
[Year.sub.l997] 9.24 0.67 0.096
[Year.sub.l998] 19.12 *** 2.57 1.08
[Year.sub.l999] 36.19 *** 5.92 ** 1.69
[Year.sub.2000] 42.89 *** 6.96 ** 2.79 **

N 88 245 134
F-statistic 12.76 *** 3.93 *** 6.95 ***
Adjusted [R.sup.2] 0.5978 0.1168 0.3299

 Dependent variable

 Problem Loans

Country group [right arrow] Transition Developing Developed
Independent variable 4 5 6
Intercept 0.371 10.55 *** 3.74
Directors 0.54 -0.09 0.023
Outside directors -0.075 * -0.021 * 0.0041
Term unspecified 1.53 -6.27 *** 0.40
Term length 0.49 -1.18 *** -0.17
Turnover -1.94 0.44 -3.30
Independent -2.39 -2.33 * 0.28
Supervision -0.63 0.40 0.24
[Year.sub.l997] 1.78 1.74 * 2.06 *
[Year.sub.l998] 1.98 1.35 0.53
[Year.sub.l999] 2.59 1.44 2.03 *
[Year.sub.2000] 0.12 1.11 0.093

N 95 260 135
F-statistic 1.17 3.19 *** 0.79
Adjusted [R.sup.2] 0.0196 0.0852 -0.0172

 Dependent variable

 Exchange rate variability

Country group [right arrow] Transition Developing Developed
Independent variable 7 8 9
Intercept -19.00 *** 311.23 *** 4.36
Directors 1.38 * ** -9.72 * 0.33
Outside directors -0.16 *** 0.33 0.080
Term unspecified 14.11 ** -272.79 *** -7.82
Term length 4.86 *** -51.11 *** -2.80 **
Turnover -24.44 *** -47.39 0.16
Independent -4.17 ** -11.08 9.38 ***
Supervision 8.50 *** 19.92 2.63
[Year.sub.l997] 0.86 1.99 2.52
[Year.sub.l998] 0.91 13.11 2.94
[Year.sub.l999] 1.21 65.83 3.06
[Year.sub.2000] 1.15 10.76 6.29 *

N 95 250 135
F-statistic 8.54 *** 2.16 ** 2.12 **
Adjusted [R.sup.2] 0.4686 0.0487 0.0840

*, **, *** denote significantly different from zero at the 10%, 5%,
1% levels, respectively.