Delegation and policy rules are frequently suggested strategies for governments to establish credible commitments. Existing literature on rules and delegation in macroeconomic policy has generally avoided the question of why governments that delegate or establish rules do not subsequently reverse this decision. Either the decision is assumed to be irreversible, or reversal is assumed to be 'politically costly' without further explanation. We develop several hypotheses which suggest that the difficulty in reversing a decision to delegate (or to establish a rule) depends on the structure of a country's political institutions. Credible commitment through delegation can only be obtained in countries where political institutions provide for checks and balances on executive authority. Checks and balances ensure that the decision to override a legally independent central bank is not the prerogative of a single actor (or veto player). In countries with these characteristics, the extent of credibility gains will be greatest when political instability is moderate and when polarisation in high. We find support for these hypotheses in tests using cross-country data - from both developed and developing countries - on central bank independence and political institutions.
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Paper provided by Centre for the Study of African Economies, University of Oxford in its series Working Papers Series with number
98-18.
Length: 22 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:oxesaf:98-18
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Find related papers by JEL classification: O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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