Central Bank Independence and Accountability: An Update

This paper provides an overview of recent research on central bank independence. First, we examine several indicators of legal independence and show that, although these indexes are mostly based on the one proposed by Cukierman et al. (1992), they reveal striking differences among some of the considered central banks. Today, central bankers face many challenges to their independence, including the growing influence of populist politicians and mounting government debt. We discuss recent studies examining the drivers of central bank independence, including political influences. There is substantial evidence that legal independence does not shield central banks from political pressure. Studies on political pressure demonstrate that populist governments are not the only ones to exert pressure on their central banks. Political pressure often causes central banks to change their policies. Most recent studies examining changes in legal central bank independence suggest a negative relationship between the two. There is a widespread belief that independent central banks should be held accountable. However, accountability is often equated with transparency. In our view, accountability should also include the ability to sanction central banks if they fail to meet the monetary policy objectives outlined in their mandates.