The Politics of Central Bank Independence

This chapter reviews recent research on the political economy of monetary policymaking, both by economists and by political scientists. The traditional argument for central bank independence is the desire to counter inflationary biases. However, studies in political science suggest that governments may delegate monetary policy in order to detach it from political debates and power struggles. The recent financial crisis has changed the role of central banks, as evidenced by unconventional monetary and macro-prudential policy measures. Financial stability and unconventional monetary policies have stronger distributional consequences than conventional monetary policies, with implications for central bank independence. However, the authors’ results do not suggest that that has happened in the wake of the Great Financial Crisis, nor has there been higher turnover of central bank governors.