In recent decades, there has been controversy over the independence of central banks from the rest of the government. Particularly in his 1970s and his 1980s, when high inflation rates rocked the United States and other countries, the current concern was that governments were biased against inflation. Politicians want central banks to help finance their spending. Conversely, politicians often oppose anything that could slow the economy, such as higher interest rates. But giving the central bank a clear goal, such as a low inflation rate, could push back against the government's overall inflation bias.
Many central banks around the world, such as the European Central Bank, therefore have the explicit goal of low inflation as their sole policy objective. The Federal Reserve has a „dual mission'' of not only keeping inflation low but also fighting recessions. However, central banks are often expected to take on other tasks as well, such as responding to financial crises and participating in banking and financial regulation.
We will not attempt to resolve these debates here, but instead simply point out a long-term pattern in which arguments for greater central bank independence appear to be predominant. David Lomeli talks about „Central Bank Independence Trends: An Unregulated Perspective'' (BAFFI CAREFIN Center Research Paper N. 217, February 2024, for a short, easy-to-read summary. https://cepr.org/voxeu/columns/recent-trends-central-bank-independent).
Essentially, Lomeli collects a record of legal changes across 42 categories that reflect more or less central bank independence. The full list of categories is below, but they can be broken down into categories such as how central bank governors and boards are selected, and governance rules. How monetary policy is set. Whether the central bank has specific statutory targets. Restrictions on direct lending to governments by central banks. Whether the central bank is fiscally independent. Rules governing reporting and disclosure to central banks.
Taken together, the basic theme is that central bank independence does not change much until around 1990, and then changes sharply upward. This change occurs in countries at all levels of economic development: high-income, middle-income, and low-income. Momentum towards greater central bank independence stalled in the years following the global financial crisis of 2007-2009, as parliamentarians and central bankers understandably focused on other issues. , and has since resumed.
Lomeli writes:
This paper presents an extensive update of the Central Bank Independence Extension (CBIE) index, originally developed in Lomeli (2022), expanding its coverage to 155 countries from 1923 to 2023. This update highlights the continuation of the global trend toward greater central bank independence. This is true across measures of national income levels and central bank independence. Despite challenges following the 2008 global financial crisis and recent renewed political scrutiny of central banks in the wake of the COVID-19 pandemic, this paper finds that the momentum for central bank reform remains unabated. I understand that. I document a total of 370 reforms in central bank design from 1923 to 2023 and provide evidence of a resurgence of commitment to central bank independence since 2016. These findings suggest that the slowdown in reforms seen since 2008 is a temporary phase and that central bank independence remains effective despite increasing political pressure on central banks. It is considered to be the basis of economic policy making.
Below is a list of 42 characteristics that influence central bank independence in the Lomeri index.