CENTRAL BANK INDEPENDENCE: New evidence of the positive effects on financial stability

New research by Alin Marius Andrieș, Anca Maria Podpiera and Nicu Sprincean contributes to the recent policy debate about central bank independence by analysing empirically its significance for the financial stability mandate.

The importance of maintaining central bank independence has been questioned after the global financial crisis (De Haan et al., 2018). This debate was stirred up by a low-inflation environment, aggressive use of unconventional monetary measures by central banks and an increased number of central bank responsibilities. 

The new range of powers in the areas of prudential supervision, financial stability and macroprudential policy can require the central bank to coordinate with the government and other regulatory institutions and increases the challenge of preserving central bank independence. 

Allegations of distributional effects across different segments of population generated by the unconventional measures employed by the central banks and of central banks over-stretching their mandates in their response to the financial crisis escalated this debate (Mersch, 2017). Based on their results, the authors of this study conclude that central bank independence is desirable for maintaining financial stability. 

Central bank independence has been credited in various empirical studies with a negative impact on inflation, both in emerging and developed economies (Cukierman, 2008). But the nexus between central bank independence and financial stability is less investigated and the related research presents mixed findings.

Cihak (2010) attributes this to the complex relationship of price stability and financial stability. Moreover, central banks have relatively less control over policy outcome within financial stability framework because they often share the responsibilities with other agencies.

The new study investigates the relationship of central bank independence and banks’ systemic risk measures. The authors look at systemic risk from three angles: the contribution of banks to systemic risk, the exposure of banks to systemic risk, and the stand-alone risk of banks. 

The sample consists of 323 banks in 40 developed and developing countries over a period of 14 years (2001-14). Central bank independence is measured by the de jure index developed by Bodea and Hicks (2015). [1]

The study finds a robust, negative and significant impact of central bank independence on the contribution and exposure of banks to systemic risk, as well as a similar impact of central bank independence on stand-alone bank risk. 

These results lend support for maintaining central bank independence as it helps banks reduce the risk they pose to the banking system as a whole as well as the risk individual banks face. 

The effect is also economically significant: a one standard deviation increase in the central bank independence index leads to a decline in the systemic contribution of the banks by 13.23%, whereas systemic risk exposure drops by 7.59%. In the same vein, individual risk diminishes by 11.94% as central bank independence raises by one standard deviation. These findings are robust after controlling for nesting and potential endogeneity issues. 

The researchers further establish that central bank independence mitigates the systemic risk contribution of banks in environments where banks hold substantial market power. At the same time, a higher degree of central bank independence may exacerbate the effect of a crisis on the contribution of banks to systemic risk. Hence, central bank coordination with fiscal policy is needed in resolving a financial crisis.



[1] This comprises four characteristics of a central bank: (i) the appointment of the governor; (ii) policy formulation attributions; (iii) central bank objectives; and (iv) limitations on central bank lending to public sector. - Andrieș, A.M., Podpiera, A.M., Sprincean, N., 2020. Central Bank Independence and Systemic Risk. BOFIT Discussion Paper 13/2020.

[2] Bodea, C., Hicks, R., 2015. Price stability and central bank independence: Discipline, credibility and democratic institutions. International Organization 69(1), 35–61.[

[3] De Haan, J., Bodea, C., Hicks, R., Eijffinger, S. (2018). Central Bank Independence Before and After the Crisis. Comparative Economic Studies 60(2), 183-202.

[4] Cihak, M., 2010. Price Stability, Financial Stability, and Central Bank Independence. Oester-reichische Nationalbank 38th Economic Conference. Wien, 45–55.

[5] Cukierman, A., 2008. Central bank independence and monetary policymaking institutions – Past, present and future. European Journal of Political Economy 24, 722–736. 


Alin Marius Andrieș, Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iasi and Institute for Economic Forecasting, Romanian Academy.

E-mail: alin.andries@uaic.ro

Website: https://sites.google.com/site/alinandries/

Twitter: https://twitter.com/alinmandries


Anca Podpiera, World Bank. 

E-mail: apodpiera@worldbank.org


Nicu Sprincean, Alexandru Ioan Cuza University of Iasi.

E-mail: sprincean.nicu@uaic.ro