Changing Winds: Central Bank Independence, An Institutionalist Analysis

The European Central Bank, Federal Reserve and Bank of England enjoy broad and extensive power to determine monetary policy. Yet how exactly do they function, and what mandate do they have over monetary policy? On what epistemological roots does their path-dependent development rest? Given that they are independent from direct political intervention, how can they be held accountable and retain their legitimacy, and what are the consequences when either is lacking? This paper addresses these questions through the lens of institutional economics, through a qualitative historical-institutional analysis of documents produced by the central banks themselves and by political actors engaging with them. It argues that the post-2008 period has produced a structural rather than transitional mismatch between the institutional design of central bank independence and the role central banks now perform in practice. Their legal mandates have remained largely unchanged, yet the practical operation of those mandates has expanded substantially under crisis conditions. This expansion of de facto authority has not been matched by a corresponding development of democratic accountability mechanisms, producing a legitimacy deficit that is increasingly visible in political contestation across the US, the EU, and the UK.