Theoretical and Empirical Investigation of relationship between Central Bank Independence and Good Governance

Economic development and increasing social welfare are main goals of economics. The new development theories focus on importance of institutions and good governance in empowering private sector and achieving economic development. In this course, the institutional mechanisms resulting in improvement of quality of government such as the independence of central bank help to attain development goals. This study examines the relationship between independence of central bank and good governance. To this end, this relationship is tested by regression model and canonical correlation analysis among selected 26 countries. The findings indicate a significantly positive link between central bank independence and good governance indicator. Out of dimensions of independence degree, the independence of monetary policy making and financial independence have statistically significant and positive correlation with good governance components, however political independence has no significant relation to such components.
In addition, the canonical correlation analysis shows that the dimensions of central bank independence degree can predict the 87 per cent of variations in good governance.