Political Pressure on Central Banks

55 Pages Posted:  

Carola Binder

Haverford College - Department of Economics

Date Written: September 4, 2018

Abstract

Even central banks with strong de jure independence may be subject to political pressure, which is difficult to measure but can have large implications for monetary policy and central bank credibility. I construct a new quarterly dataset on political pressure faced by 118 central banks from 2010 to 2018 using country-level reports from the Economist Intelligence Unit and Business Monitor International. I code whether each central bank is reportedly succumbing to political pressure, facing but resisting pressure, or not facing pressure, and details about the nature and direction of pressure. About 10% of central banks reportedly face political pressure or government interference in an average year, and 39% do so at some point. The pressure is nearly always for looser monetary policy. Pressure is more likely to come from governments with left-wing or nationalist executives, few checks and balances, or weak electoral competition. I also collect new data on when the International Monetary Fund has made recommendations to specific countries about protecting or enhancing central bank independence and show that governments are less likely to pressure the bank in the year following such a recommendation. Political pressure on the central bank is associated with higher inflation, even controlling for legal central bank independence, and with higher inflation persistence.

Keywords: central bank independence, political pressure, monetary policy, inflation, democracy

JEL Classification: E42, E52, E58, E60, D72

Suggested Citation

Binder, Carola, Political Pressure on Central Banks (September 4, 2018). Available at SSRN: https://ssrn.com/abstract=

Carola Binder (Contact Author)

Haverford College - Department of Economics ( email )

Haverford, CT 19041
United States

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