Populism and De Facto Central Bank Independence

• Published date: 01 July 2023
• DOI: http://doi.org/10.1177/00104140221139513
• Author: Michael Gavin,Mark Manger
• Date: 01 July 2023
• Subject Matter: Articles

Article

Comparative Political Studies

2023, Vol. 56(8) 1189–1223

© The Author(s) 2022

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DOI: 10.1177/00104140221139513

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Populism and De Facto

Central Bank

Independence

Michael Gavin

1

and Mark Manger

2



Abstract

Although central bank independence is a core tenet of monetary policy-

making, it remains politically contested: In many emerging markets, populist

governments are in frequent public conf‌lict with the central bank. At other

times, the same governments profess to respect the monetary authority’s

independence. We model this conf‌lict drawing on the crisis bargaining lit-

erature. Our model predicts that populist politicians will often bring a

nominally independent central bank to heel without having to change its legal

status. To provide evidence, we build a new data set of public pressure on

central banks by classifying over 9000 analyst reports using machine learning.

We f‌ind that populist politicians are more likely than non-populists to exert

public pressure on the central bank, unless checked by f‌inancial markets, and

also more likely to obtain interest rate concessions. Our f‌indings underscore

that de jure does not equal de facto central bank independence in the face of

populist pressures.

Keywords

central bank independence, populism, political economy, text analysis

1

University of Ottawa, Ottawa, ON, Canada

2

University of Toronto, Toronto, ON, Canada

Corresponding Author:

Mark Manger, Munk School of Global Affairs & Public Policy, University of Toronto, 1 Devonshire

Pl, Room 324N, Toronto, ON M5S 1A1, Canada.

Email: mark.manger@utoronto.ca

Introduction

Central bank independence—that is, the freedom of central banks to adjust

interest rates and other policy tools to f‌ight inf‌lation without political

interference—is a basic tenet of modern macroeconomic policy-making.

Without it, politicians could be tempted to prime the pump of the econ-

omy to increase their chances of re-election, as predicted by the literature on

the political business cycle going back to Nordhaus (1975). The canonical

solution (Rogoff, 1985) is to appoint a central banker with more “conser-

vative”(i.e., anti-inf‌lation) preferences than the government, and to grant

operational independence to the central bank to pursue monetary stability as

an important or even overriding objective.

The benef‌its of central bank independence are manifold. Interest rates are

set with an eye to price stability rather than the next election. The potential

inf‌lationary effects of f‌iscal policies are checked because an independent

central bank will raise interest rates to compensate for excessive government

spending (Bodea & Higashijima, 2017). Once achieved, central bank inde-

pendence lowers inf‌lation without any measurable reduction in economic

growth, making it the “only free lunch in economics”(Alesina & Summers,

1993).

And yet, central bank independence remains politically contested. Pop-

ulists, in the ascendant in many countries across the world, appear to de-

liberately seek conf‌lict with central banks. Changes to their actual statutes,

however, remain uncommon. Instances of public political pressure on

monetary authorities to lower interest rates are far more frequent. But are

populists more likely to pressure their central banks, or are they just more

conspicuous? And do their pressure tactics succeed, or are they merely empty

rhetoric?

In this paper, we model the interaction between the government, the central

bank, and the f‌inancial market as a game that draws on the crisis bargaining

literature (Kurizaki, 2007;Schultz, 1999). Our model predicts that a populist

government willing to incur a high cost of public conf‌lict will often obtain

concessions from a nominally independent central bank without having to

change its legal status. To test the model’spredictions, we construct an original

data set built on the Economist Intelligence Unit (EIU) country reports to

identify political pressure on central banks.

Our f‌indings show that while governments of many stripes try to inf‌luence

their central bank, public pressure is far more likely under a populist regime.

Moreover, economic outcomes reveal that when facing a determined populist

government, central banks are often much more pliant than their legal status

suggests. Public political pressure by populist governments on nominally

independent central banks is associated with reductions in interest rates and

upticks in inf‌lation, but the same is not true for other types of government.

1190 Comparative Political Studies 56(8)

Financial market pressure, however, can dissuade politicians from interfering

with the independence of their central bank.

Our study helps understand when and why the policies of legally inde-

pendent central banks will become politically contested. While there is little

doubt that central bank independence has reduced inf‌lation in OECD

countries, the effect in developing countries is more nuanced (Bodea & Hicks,

2015;Garriga & Rodriguez, 2020). Our paper therefore speaks to the

mounting evidence (Baerg & Lowe, 2020;Clark & Arel-Bundock, 2013) that

governments try to inf‌luence the actions of nominally independent central

banks, and that central bankers have interests beyond their commitment to the

bank’s goals.

Populist Governments and Independent Central Banks

Taking a standard threshold of central bank independence as enshrined in law,

the overwhelming majority of central banks today are legally independent.

Financial markets appreciate this development: they may not care much about

the details of microeconomic reforms, but they worry about the stability of a

country’s monetary regime (Grittersov´

a, 2017;Mosley,2003), and indications

of the weakening of legal central bank independence affect sovereign credit

ratings (Bodea & Hicks, 2018).

And yet, central bank independence is a thorn in the eye of populists.

Central banks are just one institutional pillar of the state, but in the rhetoric

of populist leaders, they are part of the technocratic elite that are the

“enemies of the people.”Unlike most mainstream politicians, populists

from Poland’s Prime Minister Jarosław Kaczy´

nski to US President Trump

have clamored for monetary policy measures to boost an often already

growing economy.

This behavior is puzzling. Governments could also issue threats behind

closed doors to make central bank policy more accommodating while

maintaining the semblance of independence in public. They could change

central bank laws to weaken independence and, in most countries, have the

authority to dismiss the central bank governor. Public attacks could be merely

rhetoric aimed at a domestic audience rather than strategic pronouncements.

Either way, their vehemence and frequency require an explanation.

Whether populists are strategic or ideological is itself contested. Ideational

and strategic views of populism concur that populists like to blame tech-

nocrats, policy experts, and a corrupt elite for political and economic ills that

affect “the people”(Mudde & Rovira Kaltwasser, 2018, 1670). While the

ideational view identif‌ies populism by what populists say, the strategic view,

following Weyland (2015),def‌ines populism by how they rule: as “per-

sonalistic leadership that rests on direct, unmediated, uninstitutionalized

support from large masses”(see also Kenny, 2018, 1). As Kenny (2017)

Gavin and Manger 1191