The Politics of Reversing Central Bank Independence
Abstract:
Central bank independence (CBI) is at risk around the world. The confluence of populism, nationalism and acute economic distress is making CBI harder to maintain. However, it remains unclear when and how CBI gets undermined? To answer these questions, we develop a novel power-political framework that outlines the conditions, and processes, under which CBI retrenchment occurs. Specifically, we argue that CBI --- splitting central banks off from governments --- helps to resolve the core political and contractual problems associated with sovereign lending. The willingness and ability of sovereign lenders to maintain this separation --- often buttressed by international surveillance and control --- depends on their power to exercise concerted pressure on governments to maintain CBI. Using an in-depth historical survey of the German Reichsbank, we demonstrate that increased government demand for monetary policy control in combination with reductions in the power of sovereign lenders drives CBI retrenchment.