Social trust and central-bank independence

•We look at the relationship between social trust and central-bank independence.•Regression results from 149 countries imply a u-shaped relationship.•Low trust entails a need for independence.•High trust entails an ability to implement and sustain independence.•Hence low and high trust is associated with high independence for central banks.

Central banks have become 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 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, the need for central-bank independence is sufficiently strong to bring it about, in spite of a low ability to undertake reform. At high trust, the ability to undertake reform is sufficiently strong to bring high independence about, in spite of a low need for it. At intermediate trust levels, lastly, neither need nor ability is strong enough to generate very independent central banks.