As we all know, central bank decisions have wide-ranging implications for people and economies. For example, the interest rate decision that the Bank makes eight times a year influences credit conditions and financial stability, which in turn affect how much consumers spend and invest.
A plausible link exists in economic theory between central bank independence and good macroeconomic outcomes, such as low and stable inflation. That is, if central banks were not independent, politicians might be tempted to loosen monetary policy in the run-up to elections in order to boost economic growth and their chances of staying in office. But, over the long run, artificially cheap credit and rapid money growth would lead to painful inflation. Hence the need for independence.
The independence of central bankers is even more important in light of recent calls for them to expand their mandates to include societal issues beyond inflation and employment targets. For example, some governments have included climate risks in their monetary policy frameworks and are starting to prioritize firms with higher environmental performance in corporate bond purchase schemes.
Other studies, like a 2021 paper by Carola Binder, have shown that despite high legal independence, central banks are still subject to all sorts of informal pressures from political leaders. The question, then, is whether these informal pressures, even when backed by strong evidence, should be taken into account when making central bank decisions. The next big challenge will be to find ways of empirically distinguishing between formal independence and political pressure, which will require identifying the institutional antecedents that shape the pressures.