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The politics of central bank independence: a theory of pandering and learning in government

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Author Info
Gauti Eggertsson
Eric Le Borgne

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Abstract

We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. Applied to monetary policy, this theory (i) formalizes the rationale for delegation highlighted by Alexander Hamilton, the first Secretary of the Treasury of the United States, and by Alan S. Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System; and (ii) does not rely on the inflation bias that underlies most existing theories of central bank independence. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) has less incentive to pander to public opinion than a politician. Our key theoretical predictions are broadly consistent with the data.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 205.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:205

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Keywords: Banks and banking; Central ; Monetary policy ; Political science;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Xiang Lin, 1999. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths: Comment," American Economic Review, American Economic Association, vol. 89(4), pages 1056-1062, September. [Downloadable!] (restricted)
  2. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October. [Downloadable!] (restricted)
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  3. Persson, Torsten & Tabellini, Guido, 1997. "Political Economics and Macroeconomic Policy," CEPR Discussion Papers 1759, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Lippi, Francesco, 1998. " On Central Bank Independence and the Stability of Policy Targets," Scandinavian Journal of Economics, Blackwell Publishing, vol. 100(2), pages 495-512, June. [Downloadable!] (restricted)
  6. Gauti B. Eggertsson, 2003. "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible," IMF Working Papers 03/64, International Monetary Fund. [Downloadable!]
  7. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May. [Downloadable!] (restricted)
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  8. Timothy Besley & Stephen Coate, 2003. "Elected Versus Appointed Regulators: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1176-1206, 09. [Downloadable!] (restricted)
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  9. Waller, Christopher J & Walsh, Carl E, 1996. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths," American Economic Review, American Economic Association, vol. 86(5), pages 1139-53, December. [Downloadable!] (restricted)
  10. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  11. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-42, March. [Downloadable!] (restricted)
  12. Alberto Alesina & Guido Tabellini, 2003. "Bureaucrats or Politicians?," Harvard Institute of Economic Research Working Papers 2009, Harvard - Institute of Economic Research. [Downloadable!]
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  13. Haan, Jakob de & Kooi, Willem J., 2000. "Does central bank independence really matter?: New evidence for developing countries using a new indicator," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 643-664, April. [Downloadable!] (restricted)
  14. Lars E.O. Svensson, 1997. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
  16. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May. [Downloadable!] (restricted)
  17. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  18. Eric Le Borgne & Gauti B. Eggertsson, 2003. "A Political Agency Theory of Central Bank Independence," IMF Working Papers 03/144, International Monetary Fund. [Downloadable!]
  19. Eric Maskin & Jean Tirole, 2004. "The Politician and the Judge: Accountability in Government," American Economic Review, American Economic Association, vol. 94(4), pages 1034-1054, September. [Downloadable!]
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  20. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-06, May.
  21. Eric Le Borgne & Ben Lockwood, 2003. "Do Elections Always Motivate Incumbents? Experimentation vs. Career Concerns," IMF Working Papers 03/57, International Monetary Fund. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leonardo Martinez, 2008. "A theory of political cycles," Working Paper 05-04, Federal Reserve Bank of Richmond. [Downloadable!]
  2. Andrew Foerster & Leonardo Martinez, 2006. "Are we working too hard or should we be working harder? A simple model of career concerns," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 79-91. [Downloadable!]
  3. Leonardo Martinez, 2009. "Reputation, career concerns, and job assignments," Working Paper 06-01, Federal Reserve Bank of Richmond. [Downloadable!]
  4. Ulrich H. Klueh & Peter Stella, 2008. "Central Bank Financial Strength and Policy Performance: An Econometric Evaluation," IMF Working Papers 08/176, International Monetary Fund. [Downloadable!]
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