This paper constructs the central bank independence and governance (CBIG) index for eight South Asian countries and examines their relationship with inflation. This CBIG index is constructed following the unique model developed by Ahsan, Skully and Wickramanayake (2006). This index consists of total 26 variables; all variables together form the overall index and different sub-sets of these variables construct sub-indices (eg. legal; political; price stability objectives; exchange rate policy; monetary policy and deficit financing; and accountability and transparency). Several countries have improved their CBIG in last fifteen years. The war torn Afghanistan have established a new central bank act in 2003 which has improved the standard of CBIG in the region. In recent time Nepal has made remarkable improvement in its ranking by allowing improved independence to its central bank. Bangladesh has taken lead in term of gradual CBIG improvement in last fifteen years. Sri Lanka, Indian and Pakistan are three countries always maintained a standard level of CBIG. Bhutan and Maldives showed less improvement among the countries. This paper also examines the statistical relationship between CBIG indices and inflation. The results indicate that there is a positive relationship between CBIG and inflation in the region which in contrary to normal expectation that inflation is one of the robust proxy of actual CBIG.
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