European Central Bank research finds greater central bank independence improves credibility and price stability across 155 countries

The European Central Bank published a blog post presenting cross-country research on whether independent central banks deliver better price stability. Using a 50-year dataset covering 155 central banks, the study concludes that stronger legal independence supports price stability by making monetary policy more credible, with evidence consistent with a causal effect. The analysis combines World Bank and International Monetary Fund macro data with a legal index of central bank independence ranging from 0 to 1, derived from 42 statutory criteria such as appointment and dismissal rules, limits on lending to government, financial independence, and reporting and disclosure requirements. Credibility is proxied by the absolute deviation of observed inflation from a country’s inflation target, and a local projections approach suggests that a 20 basis point increase in the independence index (the average change associated with reforms between 1990 and 2020) is associated with a persistent 6% increase in credibility after ten years. The largest inflation effects are reported for democratic countries, those with flexible exchange rate regimes, and those without formal monetary policy targets; the post also argues that, particularly in democracies, greater independence may allow central banks to achieve price stability with smaller policy rate increases. The post argues that weakening independence would undermine credibility and put price stability at risk, while noting that independence should be paired with democratic accountability to strengthen legitimacy and reduce political interference.