The Politics of Central Bank Independence

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Abstract

This paper reviews recent research on the political economy of monetary policy-making, both by economists and political scientists. The traditional argument for central bank independence (CBI) is based on the desire to counter inflationary biases. However, studies in political science on the determinants of central bank independence suggest that governments may choose to delegate monetary policy in order to detach it from political debates and power struggles. This argument would be especially valid in countries with coalition governments, federal structures and strongly polarized political systems. The recent financial crisis has changed the role of central banks as evidenced by the large set of new unconventional monetary and macro-prudential policy measures. But financial
stability and unconventional monetary policies have much stronger distributional
consequences than conventional monetary policies and this has potential implications for the central bank’s independence. It may also have changed the regime from monetary dominance to fiscal dominance. However, our results do not suggest that CBI has been reduced since the Great Financial Crisis. This holds both for legal measures of CBI and the turnover rate of central bank governors.
Original languageEnglish
Place of PublicationTilburg
PublisherDepartment of Economics
Number of pages25
Volume2016-004
Publication statusPublished - 20 Dec 2016

Publication series

NameEBC Discussion Paper
Volume2016-004

Fingerprint

Central bank independence
Monetary policy
Financial crisis
Central bank
Fiscal dominance
Turnover
Political system
Unconventional monetary policy
Policy making
Federal government
Policy measures
Government
Political Science
Political economy
Economists

Keywords

  • central bank independence
  • fiscal dominance
  • determinantsof CBI

Cite this

de Haan, J., & Eijffinger, S. (2016). The Politics of Central Bank Independence. (EBC Discussion Paper; Vol. 2016-004). Tilburg: Department of Economics.
de Haan, J. ; Eijffinger, Sylvester. / The Politics of Central Bank Independence. Tilburg : Department of Economics, 2016. (EBC Discussion Paper).
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de Haan, J & Eijffinger, S 2016 'The Politics of Central Bank Independence' EBC Discussion Paper, vol. 2016-004, Department of Economics, Tilburg.

The Politics of Central Bank Independence. / de Haan, J.; Eijffinger, Sylvester.

Tilburg : Department of Economics, 2016. (EBC Discussion Paper; Vol. 2016-004).

Research output: Working paperDiscussion paperOther research output

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AB - This paper reviews recent research on the political economy of monetary policy-making, both by economists and political scientists. The traditional argument for central bank independence (CBI) is based on the desire to counter inflationary biases. However, studies in political science on the determinants of central bank independence suggest that governments may choose to delegate monetary policy in order to detach it from political debates and power struggles. This argument would be especially valid in countries with coalition governments, federal structures and strongly polarized political systems. The recent financial crisis has changed the role of central banks as evidenced by the large set of new unconventional monetary and macro-prudential policy measures. But financialstability and unconventional monetary policies have much stronger distributionalconsequences than conventional monetary policies and this has potential implications for the central bank’s independence. It may also have changed the regime from monetary dominance to fiscal dominance. However, our results do not suggest that CBI has been reduced since the Great Financial Crisis. This holds both for legal measures of CBI and the turnover rate of central bank governors.

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de Haan J, Eijffinger S. The Politics of Central Bank Independence. Tilburg: Department of Economics. 2016 Dec 20. (EBC Discussion Paper).