The Impact of Central Bank Independence on Stock Market Volatility

The new paradigm in monetary policymaking gives accent to central banks‘ Independence. It is widely accepted that in modern monetary policymaking, central banks have three key goals: price stability, output stability, and financial stability. Recent studies on central bank independence mainly investigate the effects of central bank independence on economic stability. But the effectiveness of central bank independence on financial stability after the 2008 financial crises is controversial. This paper investigates the impacts of central banks’ independence on stock market volatility as a measure of financial stability. By using panel data for 53 selected countries, in the 2004- 2012 period, the results imply a positive relationship between central bank independence and stock market volatility. The findings are consistent with central bank credibility paradox.