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Europe, USA, World economy

Central bank independence before and after the Great Recession

Hereafter we report on the findings of a research carried out by Donato Masciandaro (Professor of Economics and Chair in Economics of Financial Regulation at Bocconi University) and Davide Romelli (PhD candidate in Economics at ESSEC Business School and THEMA-University of Cergy-Pontoise) and published by VOXEU where the authors investigate how the central banks’  independence has evolved since the burst of the financial crisis in 2007. The researchers argue that  since the Crisis, a silent restoration towards lower central bank independence might have been in place. The trend is more pronounced in non-OECD countries and, in particular, for the level of operational independence. The findings suggest that governments might be willing to trade off central bank independence to cope with concerns regarding financial stability, high debt and unemployment levels.

The history of central banks is rich in modifications to their role and functions. Over the past three decades, up to the 2008 Global Crisis, the mandates of central banks around the world had been progressively narrowed to the goal of price stability. At the same time, this narrowing has been accompanied by changes in their governance arrangements such that the pillar of modern central bank governance became tantamount to increasing its degree of independence. This also meant that traditional responsibilities in pursuing financial stability became progressively less important. A large literature documents that, prior to the Crisis, the direction of changes in the supervisory structure was characterised by a greater separation of central banking from supervision (Orphanides 2011, Eichengreen and Dincer 2011, Masciandaro and Quintyn 2009).

Reforms of central banks after the Crisis

However, following the Global Crisis, a significant number of reforms have taken place, mostly concerning the central bank’s role in the structure of supervision. For example, the US legislature passed the Dodd-Frank Act in 2010 which rethinks the role of the Fed as part of the reshaping of financial supervision. Even if during the discussion of the bill US lawmakers debated the possibility of restricting some of the Fed’s regulatory powers as well as increasing political control over the central bank, the Dodd-Frank Act actually ended up increasing the responsibilities of the Fed as prudential supervisor.

In Europe, policymakers are moving to finalise reforms concerning the involvement of central banks in supervision both at the regional and national levels. In 2010, the European Systemic Risk Board (ESRC) was established to provide macroprudential supervision, and this new institution is dominated by the ECB. Furthermore, in 2012 the heads of states and governments of the Eurozone started the process of establishing the European Single Supervisory Mechanism (SSM), which entered into operation in November 2014, and assigns banking supervision to the ECB together with the national supervisory authorities of the participating member states. Furthermore, in the current evolution of the Basel Capital Accord (Basel III), the activation of countercyclical macro-prudential measures has been put in the hands of central banks.

New evidence on central bank independence

These episodes are likely to provide signals of a sort of ‘silent restoration’ in central bank governance (Masciandaro 2012, Blancheton 2015). Is this the case? We support this view providing empirical evidence on the evolution of central bank independence for a sample of 45 countries over the period 1972-2014 (Masciandaro and Romelli 2015).

We consider the two main dimensions along which de jure central bank independence is usually measured: political and economic independence (Grilli et al. 1991, Debelle and Fischer 1994, Fisher 1995). Political independence refers to the discretion given to the central bank in the design and implementation of policies consistent with the monetary stability goal. Economic independence is related to the freedom of the central bank in choosing the set of instruments consistent with monetary policy. Therefore, more central bank involvement in supervision weakens the priority of monetary stability and, as a result, lowers the degree of independence of the central bank. The index of central bank independence proposed by Grilli et al. (1991) captures both political and economic independence, as well as provides information on the involvement of the central bank in banking supervision. To understand how the level of central bank independence measured in this way evolved over time, we re-compute Grilli et al.’s GMT index for a sample of 45 countries over the period 1972 and 2014. Figure 1 presents the evolution of the average degree of political and economic independence for our sample of countries.

Figure 1. The evolution of political and economic independence indices

Figure 1 highlights several important trends.

  • First, prior to the 2008 Global Crisis, a clear trend towards an increase in the level of both the political and economic central bank independence is observed.

The most striking feature is present in the early 1990s where, together with a spike in the average inflation rate, we see a significant rise in the level of central bank independence. This coincides with the break-up of the USSR, which resulted in the inclusion in the sample of several economies experiencing high inflation and which implemented significant reforms in their monetary policy institutions throughout this period. This period also coincides with the EU integration process and the creation of the ECB that required members to implement legislative reforms aimed at assigning their central banks a level of independence similar to that of the Bundesbank, the highest at the time. Furthermore, in this period, the establishment of an independent central bank became an external prerequisite to maintain or gain access in the financial markets, i.e. the political gains in changing the central bank independence level increased.

  • From this point on, a transition to a period of more stable and low inflation followed. This, as clearly depicted in Figure 1, corresponded to a levelling in the degree of central bank independence.

Furthermore, a clear reversal in the level of independence is noticeable following the Global Crisis. This trend is, in fact, captured by the degree of economic independence (GMT Operational in Figure 1), since this index is the one capturing the evolution of central bank involvement in banking supervision. Thus, the post-Crisis period, which corresponds to a very low inflation aversion, is associated with a trend towards decreasing the level of independence of central banks.

A closer look at the evolution of this index across the past four decades shows a systematic increase in its average level in every decade analysed up to 2007. This pattern is consistent whether we look separately at the political or operational GMT or whether we split the sample of countries in OECD or non-OECD members. Yet, this increasing trend is reversed after 2008. The average level of central bank independence drops and this decrease is more pronounced in non-OECD countries and, in particular, for the level of operational independence which also includes information on the involvement of the central bank in banking supervision.

Concluding remarks

This evolution suggests that since the Crisis, a silent restoration towards lower central bank independence might have been in place. This trend is reflected in the operational level of central bank independence suggesting that governments might be willing to trade off central bank independence to cope with concerns regarding financial stability, high debt and unemployment levels.


Blancheton, B (2015), “Central bank independence in historical perspective. Myth, lessons and a new model”, Economic Modelling, forthcoming.

Debelle, G and S Fischer (1994), “How independent should a central bank be?”, Conference Series38, 195–225.

Eichengreen, B and N Dincer (2011), “Who should supervise? The structure of bank supervision and the performance of the financial system”, NBER Working Paper 17401.

Fisher, S (1995), “Central-bank independence revisited”, The American Economic Review 85(2), pp. 201–206.

Grilli, V, D Masciandaro, and G Tabellini (1991), “Political and monetary institutions and public financial policies in the industrial countries”, Economic Policy 6(13), 342–392.

Masciandaro, D (2012), “Monetary policy and banking supervision: still at arm’s length? A comparative analysis”, European Journal of Comparative Economics 9(3), 349–366.

Masciandaro, D and M Quintyn (2009), “Reforming financial supervision and the role of central banks: a review of global trends, causes and effects (1998-2008)”, CEPR Policy Insight 30, 1–11.

Masciandaro D. and Romelli D. (2015), “Ups and Dows. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics”, Financial History Review(forthcoming).

Orphanides, A (2011), “Monetary policy lessons from the crisis”, in S Eijffinger and D Masciandaro (eds), Handbook of Central Banking, Financial Regulation and Supervision: After the Financial Crisis, Elgar Original Reference Series. Edward Elgar Publishing, Incorporated.



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