Central banks and fiscal policy: why independent central banks can lead to lower fiscal deficits

Over recent decades it has become common for states in Europe and elsewhere across the world to establish independent central banks. The aim of independent central banks is typically to ensure low and stable rates of inflation, however can central bank independence also influence a state’s fiscal policy? Based on a recent study, Cristina Bodea and Masaaki Higashijima write that central bank independence can have a clear impact on fiscal policy, with democracies possessing independent central banks generally having lower fiscal deficits.