The Effect of Central Bank Independence on Output and Inflation Fluctuations in Iran

This article has endeavored to study in experimental survey, the effect of Central Bank Independence (CBI) on the output and inflation fluctuations in the Iranian economy, using vector Autoregressive (VAR) econometrics method. For this purpose, we started with the changes in output and inflation stability in bringing about good economic performance, over the period 1961-2014 years. The paper has introduced a new legal combined Central Bank Independence index, by the name of "Average (Mean) Index". According to the 40% amount of total on the base of this new index, it has been cleared that there was independence just during 1340-1361 period.
The results of Generalized Autoregressive Conditional Heteroskedasticity (GARCH) method indicated that the inflation and output variances trends were approximately inverse over this period, except in some short periods. The estimation of study model revealed the negative and significant of Central Bank Independence effect on output and inflation variances. It means an increase in Central Bank Independence will cause decreasing their fluctuations and will results more macroeconomic stability and better economic performance.
According to the result of Variance Decomposition and analysis of Impulse- Response Functions, the positive impact of central bank independence on macroeconomic stability has been confirmed, but it was much more effective on the nominal sector and shrinking the inflation uncertainty than real sector and output instability.