The Politicization of Monetary Policy – Revisiting Central Bank Independence in the Light of the Current Political Climate

Abstract

Independent central banking has experienced a surge in public and academic attention during the past few years, and even more so during the ongoing COVID-19 crisis. An expanding toolset, heightened prominence and increasingly controversial policies have arguably pushed independent monetary policy towards stronger political intervention. This paper tests the hypothesis of a strengthened politicization of central banks qualitatively – by analyzing recent cases of political meddling – and quantitively – by updating the GMT index and juxtaposing its results to previous updates from 1991 and 2003. Not only the vast temporal gap between this paper and previous GMT analyses, but also the substantial economic developments since the early 2000s motivate this paper to take a refreshed look at the GMT index today. By regressing independence scores against economic indicators, the macroeconomic impact of monetary independence is demonstrated. This paper finds that in both cases, de facto and de jure, a loss in central bank independence has occurred while monetary autonomy still prevails to have a significant impact on inflation, inflation volatility and to a lesser extent on GDP per capita.