Central Bank Independence, Institutional Quality and Inflation Control in Africa: Evidence of Regional Heterogeneity

Abstract This study examined the effect of central bank independence on inflation outcomes in Africa and also examined whether institutional quality conditions the CBI–inflation relationship and whether this relationship varies across African sub-regions. The CBI weighted index, computed by Garriga (2025), was used to measure central bank independence. Inflation was measured using the inflation rate (GDP deflator). The composite institutional quality index was computed using all six dimensions of institutional quality with the use of PCA. Control variables are GDP growth rate, exchange rate, M2 (% of GDP), and trade openness. The study employed Two-way fixed-effects models with Driscoll–Kraay standard errors complemented by regional interaction models, split-sample estimations, System GMM, and panel threshold analysis. The results show that CBI has a negative but statistically insignificant effect on inflation. However, the interaction between CBI and institutional quality is negative and statistically significant. This conditioning effect exhibits substantial regional heterogeneity, as confirmed by a joint Wald test of the regional interaction terms. In contrast, the panel threshold analysis finds no statistically significant institutional-quality threshold, suggesting that the moderating effect operates more continuously than through discrete institutional regimes. Exchange-rate depreciation is positively and significantly associated with inflation across the African regions, while the System GMM estimates provide further support for the negative CBI–institutional quality interaction. The study concludes that central bank independence is not sufficient, by itself, to deliver inflation control in Africa; its effectiveness depends critically on the broader institutional environment. The study recommends that African governments should strengthen the legal and operational independence of central banks, particularly by protecting monetary authorities from short-term political pressures and fiscal dominance.