• Bank of England
• Bank of Japan
• central bank independence
• Credibility of central banks
• European Central Bank
• Federal Reserve
• Financial markets
• financial stability
• price stability

Central bank independence has been said to be one of the most relevant trends in central banking in the last thirty years. The mainstream literature agrees on saying that an independent central bank is an efficient tool to insulate monetary policy from fiscal policy, thus limiting the time inconsistency problem. Moreover, an independent central bank is considered to be more credible than a less independent one, thus providing a smoother environment for economic agents who can trust the monetary authority will meet its words with deeds. In such a scenario, it is reasonable - and empirically proved - that inflation tends to be lower. However, many such studies have been conducted previous to the establishment of the European Central Bank. We therefore extend the Cukierman et al. (1992) CBI index from 1990 to 2016 including the ECB and try to assess first if the negative correlation between inflation and central bank independence persitst when focusing on a set of industrialized countries - namely, the euro area, the USA, the Uk and Japan. Second, we rank the four central banks in terms of their credibility using a proxy by Bordo and Siklos (2008, 2014) in an attempt to see whether a more independent central bank is indeed more credible than a less independent one. Third, we perform a panel data analysis using a fixed model to test how independence and credibility impact price stability and financial stability. Our results confirm the negative relationship between inflation and CBI, as well as between inflation and credibility. After the establishment of the ECB, credibility becomes statistically more relevant as compared to CBI when we look at price stability. However, our results are in contrast with the idea that the more independent a central bank, the more credible, as the ECB is both the most independent and the least credible among those included in the study.
To further assess how these central banks reacted to variations in price stability and financial stability, we estimate an extended version of the Taylor rule using an OLS approach and splitting the data into two periods, one before the last global financial crisis (2000-2006) and one after that (2006-2016) we can see that there has been a general shift towards less independence and more discretion as many unconventional monetary policies were put in place. The interesting thing though seems to lie in the before-the-crises subset, as the Fed Reserve and the Bank of England, which have both a twofold mandate and are very credible, yet not so independent, did respond significantly to changes in the index of financial stability and were also the two countries to recover the fastest from the financial crisis. This might suggest that pursuing financial stability rather than price stability might be a better goal for central banks, as well as that there might be an optimal level of independence and credibility combined which could maximise a central bank's performance.