Why central bank independence matters – lessons from the past 50 years

23 December 2025

By Alexander Jung

Recent political pressure on central banks in some countries to ease their policy rates irrespective of the macroeconomic conditions has sparked renewed interest in the merits of central bank independence.^[1] The idea is that central banks that are insulated from government interference can devote themselves fully to the pursuit of their mandate – which, nowadays, is primarily to preserve price stability. Conversely, politically dependent central banks may be prevented from doing so. In theory, this should leave independent central banks better placed to keep prices stable.

But is this actually the case? Based on a study of 155 central banks covering a 50-year period, the research presented in this blog post shows that independence matters for price stability. Independent central banks are able to pursue more credible monetary policies and are therefore more effective at keeping inflation under control.

Lessons from the 1970s

Back in the 1970s governments and central bankers believed there was a stable trade-off between unemployment and inflation – a trade-off that could be exploited. Seemingly, much higher employment could be achieved at the cost of only somewhat higher inflation. And that, in turn, gave governments the justification to demand looser monetary policy. But, with the oil crises of the 1970s, reality hit. It turned out that high inflation and rising unemployment were both possible at the same time.

The idea of central bank independence then began to gain traction, backed by various research findings:

First, independence offers an antidote to the time-inconsistency problem. This stems from the fact that central banks implement monetary policies aimed at maintaining price stability over a relatively long horizon – inflation does not respond to changes in the monetary policy stance immediately, but rather with long and variable lags. Meanwhile, to boost their chances of re-election, governments may be tempted to stimulate the economy, even at the cost of higher inflation.^[2] Put simply, there are times when a government will choose to prioritise short-term economic growth over long-term price stability.

Second, independence was put forward to as a way to counter this inflation bias by appointing conservative central bankers who are more likely to prefer combating inflation over reducing unemployment than society as a whole.^[3]

Third, there is broad consensus that independence and inflation are negatively related overall, and that an increase in central bank independence has no adverse impact on economic growth.^[4]

Some critics have argued that the beneficial influence of independence on price stability may simply reflect correlation, not causation. Other exogenous factors, such as the Great Moderation – the period of low macroeconomic volatility in the United States between the 1980s and the financial crisis in 2007 – or globalisation, may also come into play. Both contributed to low and stable inflation in some countries, regardless of whether or not their central banks were independent.

Institutional central bank reforms have paid off

To grasp whether independence has in fact been a game changer for central banks, we need to compare economic conditions before and after independence. In order to show how independence supports price stability, we also need to control for the influence of other factors.

Our panel analysis covers institutional central bank reforms in 155 countries over the past half-century. The results show that independence does indeed contribute to price stability, because independent central banks are more credible. Particularly in democracies, independent central banks can take a more conservative approach. In other words, when aiming to maintain price stability, independent central banks may not need to raise policy interest rates quite so much.

Our empirical study explores the time-inconsistency theory, which suggests that a lack of independence can undermine the credibility of a central bank’s commitment to price stability. Or to put it another way, if the government has no say in monetary policy, the central bank is more likely to favour price stability over other more short-term objectives.

More broadly, differences in political and institutional contexts may also matter. With this in mind, our analysis also considers the confounding influence of fiscal policy and other institutional factors, such as the political system and the exchange rate regime.^[5] We show that institutional central bank reforms that enhance independence have the greatest effect on inflation in democratic countries, countries with flexible exchange rate regimes and countries without formal monetary policy targets.

How did we arrive at these results?

The quantitative analysis draws on annual macroeconomic data from the World Bank and the International Monetary Fund. It also uses a legal index measuring the degree of central bank independence over time and across countries.^[6] Derived from a detailed analysis of central bank statutes based on 42 criteria, the index ranges from 0 (the lowest level) to 1 (the highest). It can therefore be used to make international comparisons. Examples of the criteria used include the way in which board members are appointed and dismissed, monetary policy objectives and their operational implementation, limitations on lending to the government, central bank financial independence and reporting and disclosure requirements.

To test whether the thinking behind the time-inconsistency theory holds up in practice, we examined the varying degrees of central bank credibility, meaning the extent to which a central bank is able to stabilise inflation around its policy target.^[7] To this end, the study looked at absolute deviations between the observed inflation and the inflation targets for each country (overshooting and undershooting a target both have adverse effects on credibility). The smaller the deviations, the more credible the central bank (0 being the highest possible level).

So, what do the results tell us?

Chart 1 shows a positive correlation between independence and credibility. Put simply, this suggests that more independent central banks are more credible.

However, this descriptive evidence does not in itself establish causality. Other confounding factors may explain the relationship. We need to dig deeper to get a clearer picture.

Chart 1

Central bank independence and credibility

(index [0-1])

To check whether there is a causal relationship between the two variables, we use the local projections method. Thereby, we can show the impact of central bank reforms over time and their cumulative impact on our measures of policy credibility.^[8]

The results show that independence is indeed causal for credibility (see Chart 2). An increase in the independence index of 20 basis points – the average historical change from the worldwide reforms carried out between 1990 and 2020 – leads to a persistent increase in credibility by 6% after ten years.

In short, independence enhances monetary policy credibility. On average, the more independent a central bank is, the better aligned the inflation outcomes are with its target.

Chart 2

Impact of independence on credibility

(percentages)

The bottom line

The experience of the past 50 years underscores the importance of safeguarding central bank independence as a cornerstone of sound monetary policy, offering significant benefits for society. Independence is important, but this does not mean that central banks should be granted unlimited power. Making central banks democratically accountable for their policy actions strengthens legitimacy and reduces political interference.

Policymakers take note: weakening central bank independence undermines the credibility of monetary policy and puts price stability at risk.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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