The Actual Independence Index: The Legal Independence Index

This measure was created in 1992 and had an extensive revision in 2002 . The CBI index includes four measures, namely legal independence index, actual independence index, the rate of turnover of central bank governors, and a combination of the legal index, and the rate of turnover.
The Legal Independence Index consists of 16 different questions which are grouped into four clusters of issues: (i) Four questions relate to appoint, dismiss, and the term that the governor can stay at his or her office; (ii) Three questions link to the policy formulation series, which mainly concerns the resolution of divergences between the executive body and the central bank over monetary policy and involvement of the central bank in the budget procedure; (iii)

The turnover of central bank governors is based on the assumption that there is a negative correlation between the tenure of central bank governors and the degree of independence. The latter is focused on replies to a questionnaire sent to practical experts in the central banks. There are seven questions on this list divided into two areas: one consists of some questions focus on the same issues that mention in the legal index, but they concentrate on the practice rather than legitimate – for example, central bank objectives and the rules of restrictions on lending in reality; the other comprises some questions which are relevant to additional issues, such as supported advances from the central bank to the private sector, the decision-making of the central bank budget, and the targets for money stock. Like the legal independence index, the scale of coding for the questionnaire is from zero for the lowest and one for the highest. Then, by combining the two sub-indies, the Actual Independence Index is formed. As a result, the relationships between indexes of independence are showed and based on this; the level of this indicator is

The modification is done based on the four suggestions that are seen as very practical in the present time. First, in place of focusing on the appointment and dismiss of the Governor, the CWNE index concentrates on the whole central bank’s board of directors. Second, to the formulation of monetary policy, the factors including the exchange rate policy and the role of the central bank in involving public debt are added. Third, the criterion of financial independence of the central bank is joined with the implication of central bank’s capital integrity. In addition, the last factor supplemented shows the accountability of the central bank. This criterion expresses the transparency of the central bank in providing information to relevant bodies and the public. Basing on this supplement four criteria, the CWNE index has total eighteen questions spread over five areas including (i) Governance of the central bank, (ii) Central bank primary objectives, (iii) Monetary policy formulation, (iv) Central bank lending, and (v) Central bank accountability. The proportions of these factors are 0.2, 0.15, 0.15, 0.40, and 0.10 respectively