The Macroeconomic Consequences of Undermining Central Bank Independence: Evidence from Governor Transitions

> This paper examines how politically motivated changes in central bank leadership affect macroeconomic outcomes, using a new dataset on 132 governor transitions across 28 advanced and emerging economies since 2000. It shows that such transitions are associated with higher and more volatile inflation, more poorly anchored inflation expectations, more dovish expected policy responses, and declines in nominal and real short-term interest rates following their announcement. At the same time, GDP growth rises in the short run, indicating an expansionary macroeconomic impulse. These effects are strongest when incoming governors hold unorthodox monetary policy views. At the same time, long-term inflation expectations rise only in the case of politically motivated appointments of unorthodox governors while long-term growth expectations do not move. Put together, these findings suggest that political interference on its own generates a temporary trade-off between higher growth and higher inflation, but that the political appointment of unorthodox governors is what weakens the medium-to long-term credibility of the central bank.