The introduction of central bank independence (CBI) was intended to solve policymakers' time inconsistency problems regarding monetary policy. However, this reform also has unintended consequences: it often leads governments to weaken financial regulations instead. Unable to directly influence monetary policy due to CBI constraints, and sometimes limited in fiscal tools, politicians turn to deregulation as a workaround for short-term political gains.
Using both qualitative and quantitative methods, our study demonstrates that governments systematically reduce regulatory standards after adopting CBI. This connection between CBI implementation and financial deregulation appears consistent across various countries despite differing ideological contexts.
Our findings suggest this shift toward financial deregulation is not primarily driven by ideological change but rather represents a strategic response to the limitations imposed by central bank independence. Consequently, many nations' experiences with growing financialization over recent decades may include CBI as an unintentional catalyst for increased regulatory changes.
