Central bank independence: An update

Central bank independence refers to the absence of political influence on monetary policymaking. It is widely accepted that independence acts as a commitment device to achieve price stability. Despite evidence that central bank reforms towards greater independence have led to lower inflation, this column shows that there is still ample evidence for political pressure on central banks. The pressure is most often to ease monetary policy and frequently has the intended effect. This occurs through direct political pressure, appointing political allies, and partisan influences. Legal independence is necessary but not sufficient to prevent political pressure.

In their support letter for Fed governor Powell, several central bankers wrote: “The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve. It is therefore critical to preserve that independence, with full respect for the rule of law and democratic accountability.”International central bankers on the statement by Federal Reserve Chair Powell on 11 January 2026 (https://www.ecb.europa.eu/press/pr/date/2026/html/ecb.pr260113~ec4630b9fa.en.html). This column summarises our review of recent research on central bank independence (Eijffinger and de Haan 2026). The main conclusion that follows from the research surveyed is that legal independence does not shield central banks from political pressure.

Legal independence

Central bank independence refers to the absence of political influence on monetary policymaking. According to Romelli (2024), after a slowdown in central bank law reforms between 2010 and 2015, reforms led to further increases in independence in 35 cases and declines in seven cases after 2016.

Economists consider the delegation of monetary policy to an independent central bank with a clear mandate to promote price stability to be a commitment device. When an independent and ‘conservative’ (i.e. inflation-averse) central bank is in charge of monetary policy, the inflation bias caused by the time-inconsistency problem is much less than when the government is in charge of monetary policy (Rogoff 1985). The time-inconsistency problem arises from the short-term benefits of surprise inflation, such as lowering unemployment and reducing the real value of government debt. The government may be tempted to reap these short-term benefits of surprise inflation even though the long-term costs of such a policy may be high.

The time-inconsistency problem of monetary policy can be mitigated by delegating monetary authority to a central bank that has instrument-independence and is ‘conservative’. Instrument independence means the government has no influence over day-to-day monetary policy. Conservative means that the central bank is more averse to inflation deviating from the target rate than the government is. If the central bank had the same preferences as the government, it would follow the same policies as the government and independence would be irrelevant. Likewise, if the central bank were fully under the government’s control, its inflation aversion would not matter. A central bank can credibly promise to keep inflation in line with its target only if it is more inflation averse than the government and can decide on monetary policy without political interference. The empirical prediction that countries with independent and ‘conservative’ central banks will have lower inflation than those in which monetary policy is controlled by the government, has been extensively tested. Most recent research confirms that central bank reforms towards greater independence led to lower inflation (see Eijffinger and de Haan 2026 for details).

Political influence on central banks

However, even the most de jure independent central bank does not operate in a political vacuum. Even if central bank laws forbid political interference in monetary policy, political pressure may still be exerted on the central bank (Dall’Orto Mas et al. 2020). Politicians generally dislike high interest rates. There is ample evidence of this. Ehrmann and Fratzscher (2011), for example, show that, on average, European politicians favour significantly lower interest rates than the central bank. Since central bank independence is never absolute, politicians may be tempted to try to influence the central bank.

The government can affect central bank policies through several mechanisms, such as political pressure, appointing political allies to the central bank’s governing board, and partisan influences. Table 1 provides an overview of recent papers examining the political influence on central banks.

There is ample evidence for political pressure on central banks. Using panel data on 118 central banks worldwide from 2010 to 2018, Binder (2021) found, for example, that political pressure on central banks was widespread. On average, about 10% of central banks were reportedly subject to political pressure or government interference in a given year, and 39% experienced it at some point. In most cases, the pressure was to ease monetary policy. Often, the pressure involved the actual or threatened replacement of central bankers. Most research suggests that this political pressure has the intended effect, i.e. central banks ease their monetary policy following pressure. 

Table 1 Political influence on central banks

Another mechanism through which the government may exert political influence on monetary policy is appointing political allies. This brings us to the replacement and appointment of central bank governors. Several recent papers shed new light on these issues. For example, Ioannidou et al. (2025) hand-collected data on 317 governor appointments across 57 countries from 1985 to 2020. Using systematic biographical information, international press coverage, and independent expert opinions, the authors examined whether central bank governor appointments had become more or less political, following reforms aimed at insulating the central bank from political interference. Their results indicate that governments may be actively seeking to ‘undo’ institutional reforms and undermine de facto central bank independence by strategically appointing their own people to the top job. This is despite the fact that more independent governors are associated with systematically better inflation outcomes while in office.

In a recent study, Bolhuis et al. (2026) used data from 2000 to 2024 covering 132 governor transitions in 28 countries to classify transitions as either politically motivated or non-politically motivated. They found that politically motivated transitions were concentrated in four emerging countries, and that governors appointed in these transitions were more likely to be unorthodox and less technocratic than those appointed in non-politically motivated transitions. The authors found no relationship between de jure measures of central bank independence and the share of politically motivated transitions. Most importantly, inflation and short- and long-term inflation expectations are higher under governors appointed with political motivations.

Even without a political ally at the helm of the central bank, however, central banks may still change their policies depending on the incumbent government’s preferences. Some recent studies shed light on this partisan influence on central banks. For example, Carmignani (2025) examined the influence of partisanship on monetary policy. Under a Democratic president, the Fed becomes significantly more responsive to cyclical output fluctuations, i.e. it becomes less conservative. Moschella and Diodati (2020) argue that governments’ ideological positioning may shape the disagreement among governors of national central banks in the euro area. The authors test this hypothesis using an original dataset comprising the policy positions articulated in public speeches by European monetary authorities between 2001 and 2017. Their results suggest that the disagreement articulated by national central bankers is affected by the ideological inclinations of the governments of the countries they represent. In particular, disagreement between national central bank governors and the ECB increases as the position of the national government becomes more left-wing and more anti-EU.

Kuang et al. (2024) examined public perceptions of the Fed’s political bias using a survey experiment with a large, politically representative sample of US participants. They found significant heterogeneity in US consumers’ perceptions of the Fed’s political leanings. Most participants leaning toward the Democratic Party (66%) believe the Fed favours Republicans, whereas most participants leaning toward the Republican Party (60%) see it as favouring Democrats. Their findings also suggest that public perceptions of the Fed’s political leanings significantly impact trust in the institution. Participants who view the Fed as an in-group report moderately high levels of trust, while those who view it as an out-group exhibit significantly lower levels of trust.

Implications

The research surveyed shows that legal independence does not offer full protections against political influence on the central bank. However, giving up legal independence is not the proper way forward. As Issing (2013, p. 282) put it: “If the central bank’s independent status is exposed to strong political opposition, giving up independence de facto might be seen as an option to preserve de jure independence. However, this would come at the expense of undermining the fundament of independence for the central bank”.

Source : VOXeu