Two Hands on the Wheel: Independent Central Banks, Politically Responsive Governments, and Inflation (original) (raw)
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Partially Independent Central Banks, Politically Responsive Governments, and Inflation
American Journal of Political Science, 1999
Theories of central bank independence have more exact implications regarding inflation in different political-economic environments than generally understood or empirically examined. They imply that inflation in any given country-time will be a weighted average of what it would be if the central bank completely controlled monetary policy and what it would be if the government completely controlled it, with the degree of central bank independence weighting the former. An equation embodying this theoretical expectation is estimated by constrained least-squares from a time-series cross-section of inflation rates in developed democracies since the Bretton Woods era.
Beyond the Central Bank Independence Veil: New Evidence
SSRN Electronic Journal, 2018
This paper employs a new and comprehensive database of central bank institutional design to reassess the role of the independence of these public administrations in influencing the macroeconomic performance of countries, before and after the Global Financial Crisis. Using new dynamic indices, the empirical investigation takes into account the evolution of the level of independence in 65 countries over the period 1972-2014. Going beyond the standard correlation between central bank independence and inflation, we confirm the importance of the independence of these public administrations. Importantly we show that the degree of central bank independence is an endogenous variable and stress the relevance of economic and political drivers in shaping the incentives of governments to maintain or reform the governance of these public administrations.
BAFFI CAREFIN Centre Research Paper No. 2015-3, 2015
This paper analyzes the pillar of modern central bank governance, i.e. central bank independence, highlighting three contributions. First, we provide a systematic review of the economics of central bank independence. Second, using a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, taking into account both the wishes of the citizens and their own personal interests. This framework is then used to interpret the evolution of central bank independence from the Great Inflation throughout the Great Moderation – i.e. from the seventies to the first decade of the twenty-first century - and to the Great Recession during which recent reforms have shaken the design of the central banks by increasing their involvement in banking and financial supervision. Finally, we provide empirical evidence supporting this evolution of central bank independence using recently developed indices of dynamic central bank independence.
Central Bank Independence, Economic Growth and Inflation: Theories and Empirical Validations
International Journal of Applied Economics, Finance and Accounting
Economics theory's assumption is that a central bank's independence from political power entails a split between political and monetary power. Such a split is unavoidable in order to control price instability without harming other macroeconomic variables such as growth or unemployment. The theory calling for central bank autonomy, started as early as the 1970s and still gaining ground, assumes the role of central banks as an arrangement sin qua non for tying the hands of government and consequently reducing inflationary bias, or even eliminating this scourge. Moreover, such a debate is mostly relevant for monetary policy, because of its inherent incredibility. Then, our aim in this study is to test the relevance of an anti-inflationary policy, reflected in freeing the central bank from the grip of political power, to combat inflation. To this end, we examine samples of developed countries (20 countries) and developing countries (37 countries) observed over the two study periods 1997-2006 and 2007-2016. We found that high-inflation countries and atypical countries biased our results, for both inflation rates and variability. This finding remains valid even after the introduction of a set of political and economic variables likely to affect inflation.
Reconsidering central bank independence
European Journal of Political Economy, 2002
In this paper, we survey the case for central bank independence (CBI). We conclude that CBI is neither necessary nor sufficient for monetary stability. CBI is just one potentially useful monetary policy design instrument among several, and CBI should not be treated as an exogenous variable. Instead, the question that should be addressed is why societies decide to make their central banks independent? The reasons why CBI is chosen are related to legal, political, and economic systems. A number of empirical studies find correlations between CBI and low inflation rates. Endogeneity of CBI suggests, however, that the correlation has no implications for causality. D
An independent central bank faced with elected governments
European Journal of Political Economy, 2004
The literature argues that the benefits of an independent Central Bank accrue at no cost to the real side. In this paper, we argue that the lack of correlation between monetary autonomy and output variability, is due to the proactive role of fiscal policy when faced with rigid monetary objectives. Few of the attempts to measure these correlations actually allow for a changing fiscal role. Yet, when monetary policy is handled by an independent authority, fiscal and wage/social protection policies remain as an instrument in the hands of elected governments. We find that, so long as the two authorities pursue their goals independently of each other, a conflict arises which becomes stronger as preferences diverge. Further to that, we find that the establishment of a conservative Central Bank encourages more divergent preferences amongst the public (as reflected in the governments they elect). The election of more interventionist governments then makes it harder for either authority to reach their own preferred objectives, unless they are able to co-operate.
Bureaucratic Delegation and Political Institutions: When Are Independent Central Banks Irrelevant?
Policy Research Working Papers, 1999
Delegation to independent agencies is often suggested as a remedy for politicallymotivated inefficiencies in government decision making. For example, irrevocable delegation to an independent central bank can mitigate the inflation bias created by political incentives to renege on policy commitments. In practice, however, the irrevocability of delegation depends on the specific institutional details of political decision making. We develop a model of monetary policy that identifies, first, the independent effect of these institutions on inflation expectations and, second, the additional effect of delegation to an independent central bank. We find empirical support for the model in tests of three predictions: the presence of an independent central bank should reduce inflation only in the presence of political checks and balances; political interference with the central bank should be more apparent when there are few checks and balances; and the effects of checks and balances should be greater when political decision makers are more polarized.
The benefits of central bank's political independence
European Economic Review 48 (2004) 353 – 378, 2004
We consider a two-tier model of monetary policy where the central banker is both subject to the explicit in uence of elected political principals through contracts and the implicit in uence of interest groups willing to capture monetary policy. We analyze the impact of granting independence to the central banker on the scope for capture and the agency costs of delegating the monetary policy to a central banker. Political independence increases those agency costs but signiÿcantly stabilizes the politically induced uctuations of in ation and improves ex ante social welfare.