In Search of the Origin of Political Pressure on Central Banks
Aquilina, Catherine Ann
In light of increased political pressure on central banks around the world there have been a number of studies done exploring the effect this pressure has on both the independence of central banks, and financial markets (Binder 2018). The purpose of this study is to explore the origins and drivers of the increase in pressure on central banks. This paper hypothesizes that pressure on central banks are tied to macroprudential policies put in place during and after the financial crisis. After the financial crisis, central banks were entrusted with the ability to ensure a safer financial system by numerous governments around the world (Masciandaro and Romelli 2018). As the economy recovered central banks used these powers to increase the amount of macroprudential regulations on the banking system, and raised interest rates in hopes of preventing the economy from overheating. This increase in borrowing costs and greater institutional powers are in direct contrast with the values of nationalist movements also rising around the globe (McPilemy and Moschella 2019). As nationalist politicians and populations yearn for lower borrowing costs and push anti-establishment rhetoric they find their antagonists in their nations central bank. Using Carola Binder’s (2018) definition of political pressure on central banks and utilizing panel data for 119 countries in the time span between 2010 and 2018, this study finds a significant relationship between central banks’ heightened role in macroprudential regulation and pressures on central banks. This means that it is not a central bank’s actions that are a driver of the political pressure they face, but rather their powers.
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