Between fostering and limiting central bank independence: The impact of constitutional courts decisions

The proposed research investigates the consequences of legal challenges to central banks, stemming from a lack of clarity on the legal boundaries of monetary policy actions. Considering legal action as potential threat to central bank independence, such measures may translate into less effective transmission of monetary policy to the real and financial sectors. By contrast, support from the Supreme Courts for ECB measures, even if non-traditional, might enhance effective transmission. While the literature on central bank announcement effects is comparatively large, there is a lack of studies explicitly focusing on expectations regarding doubts and uncertainty about the legitimacy of central bank policies. We study high-frequency movements of financial instruments at dates of legal challenges and subsequent rulings addressing European Central Bank (ECB) policy during and after the Great Recession. Specifically, we measure the financial and real consequences of uncertainty about the legality of monetary policy actions such as the outright monetary transactions
program by the ECB that was challenged before the Federal Constitutional Court of Germany and
the European Court of Justice.