The Side Effects of Central Bank Independence

Forthcoming at the American Journal of Political Science

35 Pages Posted: 22 Jun 2016 Last revised: 2 Nov 2020

See all articles by Michaël Aklin

Michaël Aklin

University of Pittsburgh - Department of Political Science

Andreas Kern

Georgetown University - McCourt School of Public Policy

Date Written: September 14, 2018

Abstract

Central bank independence (CBI) solves the time inconsistency problem faced by policymakers with respect to monetary policy. However, it does not solve their underlying incentives to manipulate the economy for political gains. Unable to use monetary policy, and often limited in their ability to use fiscal spending, governments can resort to financial deregulation to generate short term political benefits. We show qualitatively and quantitatively that governments systematically weaken financial regulations in the aftermath of CBI, and that the effect of CBI is separate from an ideological shift toward liberalization. Our findings suggest that the growing financialization of the economy experienced by many countries over the last few decades is partly a by-product of central bank independence.

Keywords: central bank independence, liberalization, financial deregulation, financialization

JEL Classification: D78, G18, G28, E58

Suggested Citation

Aklin, Michaël and Kern, Andreas, The Side Effects of Central Bank Independence (September 14, 2018). Forthcoming at the American Journal of Political Science, Available at SSRN: https://ssrn.com/abstract=2799220 or http://dx.doi.org/10.2139/ssrn.2799220

Michaël Aklin (Contact Author)

University of Pittsburgh - Department of Political Science ( email )

4600 Posvar Hall
Pittsburgh, PA 15260
United States

Andreas Kern

Georgetown University - McCourt School of Public Policy ( email )

37 and O Streets, NW
Old North, Suite 413
Washington, DC 20057
United States

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