The European Central Bank published a Working Paper assessing whether legal reforms that increase central bank independence improve monetary policy discipline and credibility. Using data for 155 countries over 1972–2023, the authors find that reforms strengthening legal central bank independence are associated with lower excess money growth and stronger credibility, with effects building gradually and reaching their full impact after around ten years. Instrumental-variable local projections suggest that a one-percentage-point increase in the central bank independence index is associated with a 21% reduction in excess money growth and an almost 13% improvement in credibility after ten years. The effects are stronger in countries that do not later reverse reforms, and are most pronounced in democracies, countries with flexible exchange rates, and those without a monetary policy strategy, while being weak or absent in inflation-targeting and fixed-exchange-rate regimes. The impact is amplified when public debt-to-GDP ratios are high, with materially larger reductions in excess money growth in countries above 90% debt-to-GDP than in low-debt environments; semiparametric estimates for “relevant” reforms (≥4.6 percentage points in the index) indicate a roughly 2–3% reduction in excess money growth after ten years that persists over longer horizons.
European Central Bank 2025-04-09
European Central Bank research finds legal central bank independence reforms strengthen monetary discipline and credibility
The European Central Bank's Working Paper finds that legal reforms enhancing central bank independence correlate with reduced excess money growth and improved credibility, with full effects manifesting after ten years. A one-percentage-point increase in the independence index leads to a 21% reduction in excess money growth and a 13% credibility boost, especially in democracies and high public debt environments. The impact is less significant in inflation-targeting and fixed-exchange-rate regimes.