(In)Dependent Central Banks

Abstract

Since the 1980s, many countries have reformed their central banks to enhance operational independence. Using biographical data, press coverage, and expert opinions, we find that during this period, appointments of central bank governors became increasingly politically motivated, particularly following legislative reforms intended to insulate central banks and their governors from political interference.  Furthermore, we show that politically motivated appointments are associated with lower de facto independence and worse economic and financial outcomes. As central banks worldwide have gained greater power, our findings contribute to the debate on their democratic accountability and credibility.

Keywords: central banking, central bank independence, governor appointment, legislative reforms, political connections, inflation, financial stability, stock markets

JEL Classification: E58, G00, P16