The Macroeconomic Consequences of Undermining Central Bank Independence

This paper studies the macroeconomic consequences of undermining central bank independence through politically motivated transitions of central bank governors. Leveraging a new panel dataset covering 132 central bank governor transitions in 28 advanced and emerging market economies since 2000, we document the timing, frequency, and political drivers of these leadership changes. Tenures of governors with politically motivated appointments are associated with higher and more volatile inflation, realized and expected. Professional forecasters also tend to expect such governors to be more dovish when responding to shifts in inflation. Using local projections in a difference-in[1]difference setting, we find that following the announcement of a politically motivated governor transition nominal and real short rates decline and expected and realized inflation rise. At the same time, GDP growth increases in the aftermath of such transitions, consistent with an expansionary short-run macroeconomic impulse. These effects are more pronounced when the incoming governor professes unorthodox views on monetary policy, suggesting that political interference in central bank leadership induces a temporary growth–inflation trade-off. Long-term inflation expectations only rise in the case of unorthodox governors with politically motivated appointments, suggesting costs to central bank credibility are much more pronounced in those cases.