Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics

Financial History Review, Cambridge University Press, vol. 22(03), pp. 259-289, December 2015

BAFFI CAREFIN Centre Research Paper No. 2015-3

28 Pages Posted: 9 Apr 2015 Last revised: 24 Aug 2016

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics

Davide Romelli

Trinity College (Dublin) - Department of Economics

Date Written: March 1, 2015

Abstract

This paper analyzes the pillar of modern central bank governance, i.e. central bank independence, highlighting three contributions. First, we provide a systematic review of the economics of central bank independence. Second, using a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, taking into account both the wishes of the citizens and their own personal interests. This framework is then used to interpret the evolution of central bank independence from the Great Inflation throughout the Great Moderation – i.e. from the seventies to the first decade of the twenty-first century – and to the Great Recession during which recent reforms have shaken the design of the central banks by increasing their involvement in banking and financial supervision. Finally, we provide empirical evidence supporting this evolution of central bank independence using recently developed indices of dynamic central bank independence.

Keywords: Monetary Policy, Central Bank Independence, Banking Supervision, Global Financial Crisis.

JEL Classification: E31, E52, E58, E62

Suggested Citation

Masciandaro, Donato and Romelli, Davide, Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics (March 1, 2015). Financial History Review, Cambridge University Press, vol. 22(03), pp. 259-289, December 2015; BAFFI CAREFIN Centre Research Paper No. 2015-3. Available at SSRN: https://ssrn.com/abstract=2591904 or http://dx.doi.org/10.2139/ssrn.2591904

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Davide Romelli

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

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