European Central Bank working paper links Great Moderation performance to rule of law rather than central bank regimes and ties 2022 inflation surge to Russian import exposure

The European Central Bank published a working paper (No 3124) analysing cross-country differences in inflation and growth stability during the Great Moderation across 37 advanced economies since 1986. It finds that long-run central bank performance is consistently associated with broader institutional quality, proxied by the World Bank Rule of Law indicator, while central bank-specific features such as independence, exchange rate regime and inflation targeting do not show a statistically significant relationship once institutional quality is accounted for. The study measures performance using CPI and GDP deflator inflation levels and volatility, real GDP growth volatility and an aggregate indicator, applying Bayesian model averaging and robustness checks across alternative samples and specifications. A model including only Rule of Law is identified as the best fit for the overall performance measure, with the relationship persisting within pegged regimes including the euro area. The paper also extends the cross-sectional approach to the 2022 inflation resurgence, using pre-2022 characteristics: it reports that reliance on imports from Russia is the strongest predictor of the headline inflation surprise, and that the interaction between Russian import exposure and post-COVID GDP growth is significant for both headline and core inflation, while institutional quality and variables such as fiscal stance and trade openness are statistically insignificant. The results are presented as evidence that the 2022 surge reflected contingent supply-side factors rather than a reversal of Great Moderation dynamics.