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Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics

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  • Donato Masciandaro
  • Davide Romelli

Abstract

This paper analyzes the pillar of modern central bank governance, i.e. central bank independence, highlighting three contributions. First, we provide a systematic review of the economics of central bank independence. Second, using a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, 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 throughout the Great Moderation – i.e. from the seventies to the first decade of the twenty-first century – and to the Great Recession during which recent reforms have shaken the design of the central banks by increasing their involvement in banking and financial supervision. Finally, we provide empirical evidence supporting this evolution of central bank independence using recently developed indices of dynamic central bank independence.

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  • Donato Masciandaro & Davide Romelli, 2015. "Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics," BAFFI CAREFIN Working Papers 1503, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
  • Handle: RePEc:baf:cbafwp:cbafwp1503
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    Cited by:

    1. Jakob de Haan & Sylvester Eijffinger, 2016. "The politics of central bank independence," DNB Working Papers 539, Netherlands Central Bank, Research Department.
    2. Donato Masciandaro, 2016. "More than the Human Appendix: Fed Capital and Central Bank Financial Independence," BAFFI CAREFIN Working Papers 1635, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Favaretto, Federico & Masciandaro, Donato, 2016. "Doves, hawks and pigeons: Behavioral monetary policy and interest rate inertia," Journal of Financial Stability, Elsevier, vol. 27(C), pages 50-58.
    4. Issing, Otmar, 2018. "Stabiles Geld - eine Illusion? Alternative Währungssysteme - Hayeks Fundamentalkritik - Unabhängigkeit der Notenbanken," SAFE White Paper Series 52, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:855-864 is not listed on IDEAS
    6. Papadamou, Stephanos & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2017. "Does central bank independence affect stock market volatility?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 855-864.

    More about this item

    Keywords

    Monetary Policy; Central Bank Independence; Banking Supervision; Global Financial Crisis;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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