Political Pressure on Central Banks

Abstract

I construct a quarterly data set on political pressure faced by 118 central banks from 2010 to 2018 using country‐level reports. I code whether each central bank is reportedly succumbing to pressure or resisting pressure. About 10% of central banks reportedly face political pressure in an average year. Even central banks with high legal independence frequently face pressure—nearly always for looser monetary policy. Pressure on the central bank is associated with higher inflation and inflation persistence. Pressure is more likely to come from governments with left‐wing or nationalist executives, few checks and balances, or weak electoral competition.

Populism and De Facto Central Bank Independence

“…Maier et al (2002) conclude in a similar analysis of the Bundesbank that pressure was ineffective. More recently, Binder (2021) extends these results by classifying instances of political pressure from country reports published by the EIU and Business Monitor International. Binder finds that left and nationalist parties are more likely to pressure their central bank to loosen monetary policy.…”

Central bank independence in Latin America: Politicization and de‐delegation

“…Indeed, informal contestation of CBI is frequent (Binder, 2021a(Binder, , 2021bEhrmann & Fratzscher, 2011;Havrilesky, 1995;Selmayr & Zilioli, 2007). On the side of the principal, contestation of delegation usually amounts to public requests for lower interest rates, statements that the central bank's policy is not appropriate for economic conditions, or meetings called by the government with the central bank.…”

“…In turn, central banks can protest that politics is not part of their decisions, note that government's rebukes reduce their credibility to achieve low inflation, or even remark on government's fiscal policy plans as inflationary. Binder (2021aBinder ( , 2021b identifies instances of political pressure on central banks. In Latin America, since 2010, each year, two to five countries have seen informal pressure on central banks to adjust monetary policy.…”

“…Yet, academics and practitioners question delegation to central banks on grounds of democratic accountability (De Haan & Amtenbrink, 2000;Stasavage, 2003) or due to CBI's negative externalities when politicians aim to elude delegation for political survival (Aklin & Kern, 2020;. Furthermore, governments have attacked central banks' decisions (Binder, 2021a(Binder, , 2021bSelmayr & Zilioli, 2007) and, more drastically, dismissed central bank leadership in an abrupt and irregular manner (Dreher et al, 2008(Dreher et al, , 2010. In rarer instances, governments have reclaimed powers delegated to central banks, regaining some political control over monetary policy.…”

Presidential antagonism and central bank credibility

“…The Great Recession, financial crisis, and growing populist sentiment have contributed to greater politicization of monetary policy and critique of independent central banks (Blinder et al., 2017; Summers, 2017; de Haan & Eijffinger, 2017; Goodhart & Lastra, 2018; Issing, 2018). Binder (2019) shows that political pressure is prevalent on central banks across the world, regardless of central banks' legal independence, and tends to be followed by higher inflation. Yet little is known about such how political interference affects inflation expectations or interacts with the central bank's efforts to communicate with the public.…”