Working Paper No. 920

Social Trust and Central-Bank Independence

Published: May 23, 2012Keywords: Trust; Credibility; Reforms; Monetary Policy; Inflation; Central Bank; Time InconsistencyJEL-codes: E52; E58; P48; Z13
Published version

Social Trust and Central-Bank Independence Niclas Berggren, Sven-Olov Daunfeldt and Jörgen Hellström


Central banks have been made more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm that there is such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust levels, the need for central-bank independence is strong enough to dominate the low ability; at high trust levels the ability for reform is high and dominates the low need; at intermediate trust levels there is neither need nor ability strong enough to generate very independent central banks.

Niclas Berggren

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niclas.berggren@ifn.se

Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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