Central bank independence reforms do lead to stronger monetary discipline and greater policy credibility, but only gradually and under the right institutional conditions, according to a new European Central Bank working paper analysing more than five decades of global data.
The paper, Do central bank reforms lead to more monetary discipline?, examines reforms to central bank statutes in 155 countries between 1972 and 2023. It finds that legal changes strengthening independence are associated with slower excess money growth and improved credibility, measured by how closely inflation outcomes align with announced policy goals. However, the effects typically take around a decade to fully materialise.
Independence works, but slowly
Using a combination of local projections with instrumental variables and semiparametric methods, the authors show that an increase in legal central bank independence is followed by a sustained reduction in excess broad money growth. On average, a one percentage point rise in the independence index is linked to a reduction in excess money growth of around 20 percent after ten years.
Credibility improves as well, though again with long lags. Inflation outcomes tend to move closer to policy targets roughly eight to ten years after reforms are enacted, suggesting that institutional trust is built gradually rather than immediately.
The paper stresses that these are long-run institutional effects, not short-term policy tools. Independence reforms do not deliver instant results and should not be judged on near-term inflation outcomes alone.
Political and institutional conditions matter
One of the paper’s key findings is that central bank independence is not equally effective everywhere. The disciplining effects are strongest in democratic countries, where political interference is more constrained and accountability mechanisms are clearer. In non-democratic systems, the estimated effects are weaker and often statistically insignificant.
Monetary regimes also shape outcomes. Independence reforms have a larger impact in countries without a formal monetary policy strategy, such as inflation targeting, and in economies with flexible exchange rates. In inflation-targeting countries, much of the credibility gain appears to come from the framework itself rather than from legal independence alone.
Fiscal conditions play an important role as well. The paper finds that independence reforms are most effective in high-debt environments, where they help limit pressures on central banks to monetise public deficits. In countries with debt-to-GDP ratios above 90 percent, the reduction in excess money growth following reforms is significantly larger than in low-debt economies.
Reforms versus reversals
The authors also examine large, discrete reforms and reversals. Major reforms that significantly strengthen independence lead to lasting improvements in monetary discipline and credibility, but again only after several years. Reversals, by contrast, tend to increase excess money growth, although the estimated effects are less precise due to the small number of observed cases.
Importantly, reforms appear to be more effective when they are not later undone. Countries that strengthened independence and then maintained it saw stronger long-run discipline than those where reforms were partially reversed through later legal or political changes.
Why it matters now
The findings arrive at a time when central banks face renewed political pressure following years of unconventional monetary policy, high public debt, and cost-of-living concerns. While the paper does not focus on current euro area governance, its conclusions reinforce the ECB’s longstanding emphasis on legal independence as a foundation for price stability.
At the same time, the authors caution that independence is not a cure-all. In advanced economies where independence is already high, additional gains may be limited unless accompanied by credible fiscal frameworks and broader institutional support.
For policymakers, the message is clear: weakening central bank autonomy carries long-term risks, while strengthening it pays off slowly but persistently. Institutional credibility, once lost, is difficult to rebuild.