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Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics

Published online by Cambridge University Press:  17 December 2015

Donato Masciandaro  and
Davide Romelli
Donato Masciandaro*
Affiliation:
Bocconi University and SUERF
Davide Romelli
Affiliation:
ESSEC Business School and THEMA Cergy-Pontoise
*
D. Masciandaro (corresponding author), Department of Economics and Baffi Carefin Centre, Bocconi University, via Roentgen 1, 20136, Milan (Italy); and SUERF – The European Money and Finance Forum; email: donato.masciandaro@unibocconi.it.
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Abstract

This article analyses the pillar of modern central bank governance, i.e. central bank independence, from three perspectives. First, we provide a systematic review of the economics of central bank independence. Second, applying a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, while 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 (1970s), throughout the Great Moderation (1980s-2000s) and to the Great Recession (2007-14). We provide empirical evidence supporting this evolution using recently developed indices of dynamic central bank independence. Further, our findings stress the importance of macroeconomic shocks in shaping the evolution of central bank independence after the global financial crisis.

Keywords

monetary policycentral bank independencebanking supervisionglobal financial crisis

JEL classification

E62: Fiscal Policy E31: Price Level • Inflation • Deflation E52: Monetary Policy E58: Central Banks and Their Policies
Type
Articles
Information
Financial History Review , Volume 22 , Issue 3 , December 2015 , pp. 259 - 289
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Copyright
Copyright © European Association for Banking and Financial History e.V. 2015 

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