Abstract

Monetary policy, typically set by a nation’s central bank, mainly focuses on managing
price stability and encouraging economic growth. Arguably, this means that in shaping its
monetary policy, a central bank also influences the behavior of its country’s residents. In this
context, we investigate if differing cultural and societal behaviors could make a central bank’s job
easier or more challenging. Specifically, we use five of the six dimensions of national culture from
Geert Hofstede and information on a country’s political, legal, and institutional framework to
examine whether a country’s cultural and/or institutional environment affects the efficiency of its
monetary policy, as reflected in both price stability and economic growth. Our findings suggest
that culture and societal behavior indeed play a role in how effective a country’s monetary policy
can be. For instance, we find that countries with high Power Distance and Individualism tend to
be less efficient, whereas societies with more Indulgence tend to be more efficient. Additionally,
our research supports previous findings regarding the positive effect of inflation-targeting on
monetary policy efficiency.