The influence of financial market development on de jure central bank independence in the Asia–Pacific

Abstract

Purpose: This study investigates the impact of financial development, measured by the ratio of broad money to gross domestic products, on de jure central bank (CB) independence (CBI) in 17 countries in the Asia–Pacific region from 1995 to 2014. Design/methodology/approach: This study uses the feasible generalized least squares (FGLS) approach, which is suitable since the CBI equation suffers from contemporaneous correlation, serial correlation and heteroscedasticity. Findings: The FGLS results suggest a positive association between CBI and financial market development (FMD). This relationship is confirmed when estimating different indicators of de jure CBI and adopting the panel-corrected standard error estimate. However, the statistical significance of FMD is not supported when the ratio of domestic credit to the private sector to GDP is measured. Research limitations/implications: It is significant to have a developed financial system to foster a better CBI. Moreover, it is important to measure the influence of financial market players on the operations of a CB. Originality/value: The financial market in the Asia–Pacific has improved over the years. Hence, the results show the determinants of CBI in the Asia–Pacific, especially the role of FMD.