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Legal independence is not sufficient to guarantee that a central bank is not captured by political interests. Image: Getty Images

Despite well-intentioned legal reforms being aimed at ensuring central bank independence, data suggests that they may actually have the opposite effect. Written by Vasso Ioannidou, Sotirios Kokas, Thomas Lambert and Alexander Michaelides.

Since the late 1980s, many countries have reformed their central banks’ legal framework to protect them from undue political influence and to safeguard price and financial stability. However, legal – or de jure – independence does not necessarily translate into actual – or de facto – independence. Laws are often incomplete, but even when they are explicit, actual practice may deviate.

Policy reforms may also give rise to a ‘seesaw effect’: when a reform takes place in one dimension, politicians may try to use a different instrument to attain the same goal. One way in which politicians may seek to retain control over monetary policy is by ‘getting their own people into the top jobs’.

In a recent paper, we examined whether central bank governor appointments around the world have become more, or less, political following significant legal reforms aiming to insulate the central bank and its governor from political interference. We define a politically motivated governor appointment as one where the appointment is in favour of a candidate who is more loyal to the executive making the appointment than to the central bank mandate.

Furthermore, the paper explores whether politically motivated appointments affect central bank policy outcomes. We focus on central bank governors because of their disproportionate importance in running the central bank, in the same spirit that CEOs matter for corporate decisions.


It is natural to expect that if the original goal of improving de jure central bank independence were to reduce political interference, de jure independence should be negatively correlated with politically motivated appointments. Therefore, if the stated goal is to make the central bank more politically independent, then we should expect less politically motivated governor appointments, so that de jure independence more convincingly becomes de facto.

This intuition suggests that the correlation between metrics of de jure independence and more independent governor appointments should be positive. They should increase in tandem.

However, a positive correlation is not the only possible outcome. Politicians that appoint close allies at the central bank might look for alternative ways to circumvent the enacted central bank independence legislation, especially when reversing such legislation is difficult. 

Therefore, the correlation between de jure independence and more independent governor appointments may disappear, or even turn negative, if politicians actively seek to subvert the legal reforms by appointing central bank governors with close ties to the government.

Measuring politically motivated governor appointments

To examine which of these narratives better describes the data, we hand-collected systematic information on 316 central bank governor appointments in 57 countries between 1985 and 2020. We combined three complementary sources of information into an index characterising whether, at the time of the appointment, a governor was perceived as being independent from the executive. 

The three sources were biographical information (ties with the executive through prior employment, shared ideology with the ruling party or personal links), the perception of the international press of the political independence (or lack thereof) of the appointed governor, and the opinions of independent academic experts about the perceived political independence of a particular governor at the time of appointment in their respective countries via a large-scale survey.

New insights on central bank independence 

From the data we do not find support for the narrative that governor appointments have become more independent over time, despite significant improvements in de jure central bank independence. There is no discernible relation between our governor appointment index and measures of de jure independence.

Furthermore, not only have governor appointments not become more independent on average, but they may have become more political as central banks are given more operational independence. The relation between our governor appointment index and legal reforms that aim to insulate the governor from political interference turns strongly negative when central banks are given more policy or financial independence and their operations become less transparent. 

These results suggest that governments may actively seek to undo legal reforms and undermine de facto central bank independence through the governor appointment process.

Central bank independence and policy outcomes: a reappraisal

A pressing question that arises from the finding that de facto central bank independence is not associated with de jure central bank independence is whether de jure and de facto independence correlate with worse policy outcomes.

We find that a negative relation between inflation rates and de facto independence exists, but not for de jure central bank independence. The results also hold when we restrict attention to countries with explicit inflation targets; the mean deviation between inflation and the inflation target has a zero correlation with de jure central bank independence, but an economically significant negative correlation with de facto central bank independence. 

These results show that de facto central bank independence correlates more strongly with central bank inflation outcomes than de jure independence. 

Since many central banks also have financial stability responsibilities, a related question is whether de jure and de facto central bank independence correlate with financial stability outcomes. Our data confirms that unlike de jure independence, de facto independence exhibits a negative correlation with financial instability (as captured, for example, by the likelihood of experiencing a banking crisis).

Policy implications

First, undue political influence on central bank appointments reduces the credibility of a central bank and therefore potentially allows the time inconsistency problem – describing a situation in which a policy rule is made but expected to be discontinued, and is therefore not committed to – to resurface, regardless of the level of de jure central bank independence. 

Second, our results illustrate that legal independence is not sufficient to guarantee that the central bank is not captured by political interests. As central bank powers continue to expand from monetary policy, to financial stability, and more recently to digital currencies and climate finance, external pressures on central banks are only expected to expand. Therefore, the design of a central bank’s institutional architecture should be further scrutinised for political accountability and credibility in the future.


Portrait images of Vasso Ioannidou, Sotirios Kokas, Thomas Lambert and Alexander Michaelides

Written by Vasso Ioannidou (Bayes Business School and the Centre for Economic Policy Research (CEPR)), Sotirios Kokas (University of Essex), Thomas Lambert (Erasmus University Rotterdam) and Alexander Michaelides (Imperial College London and CEPR).

In collaboration with the Centre for Economic Policy Research.


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