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Goal-Independent Central Banks: Why Politicians Decide to Delegate

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  • Christopher W. Crowe

Abstract

A motivation for central bank independence (CBI) is that policy delegation helps politicians manage diverse coalitions. This paper develops a model of coalition formation that predicts when delegation will occur. An analysis of policy preferences survey data and CBI indicators supports the predictions. Case studies, drawn from several countries' recent past and the nineteenth-century United States, provide further support. Finally, the model explains why the expected negative relationship between CBI and inflation is not empirically robust: endogenous selection biases the estimated effect towards zero. The data confirm this.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/256.

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Length: 41
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/256

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  1. Debraj Ray & Rajiv Vohra, 1996. "A Theory of Endogenous Coalition Structure," Papers 0068, Boston University - Industry Studies Programme.
  2. Demange, G., 1991. "Intermediate Preferences and Stable Coalition Structures," DELTA Working Papers 91-16, DELTA (Ecole normale supérieure).
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  4. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, vol. 43(8), pages 1569-1593, August.
  5. Christopher W. Crowe, 2006. "Goal-Independent Central Banks: Why Politicians Decide to Delegate," IMF Working Papers 06/256, International Monetary Fund.
  6. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  7. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May.
  8. Levy, Gilat, 2004. "A model of political parties," Journal of Economic Theory, Elsevier, vol. 115(2), pages 250-277, April.
  9. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
  10. Gauti B. Eggertsson & Eric Le Borgne, 2010. "A Political Agency Theory of Central Bank Independence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 647-677, 06.
  11. Bernhard, William & Leblang, David, 2002. "Political Parties and Monetary Commitments," International Organization, Cambridge University Press, vol. 56(04), pages 803-830, September.
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  14. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  15. Vishnu Padayachee, 2001. "Central Bank transformation in a globalized world: the Reserve Bank in post-apartheid South Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(6), pages 741-765.
  16. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, January.
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Citations

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Cited by:
  1. Daunfeldt, Sven-Olov & Hellström, Jörgen & Landström, Mats, 2009. "Why Do Politicians Implement Central Bank Independence Reforms?," Ratio Working Papers 143, The Ratio Institute.
  2. Ansgar Belke & Niklas Potrafke, 2009. "Does Government Ideology Matter in Monetary Policy? – A Panel Data Analysis for OECD Countries," Ruhr Economic Papers 0094, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Niklas Potrafke, 2012. "Zum Einfluss von Regierungsideologie und Zentralbankunabhängigkeit auf die Geldpolitik," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(11), pages 25-26, 06.
  4. Crowe, Christopher, 2008. "Goal independent central banks: Why politicians decide to delegate," European Journal of Political Economy, Elsevier, vol. 24(4), pages 748-762, December.
  5. Crowe, Christopher & Meade, Ellen E., 2008. "Central bank independence and transparency: Evolution and effectiveness," European Journal of Political Economy, Elsevier, vol. 24(4), pages 763-777, December.
  6. Marc Quintyn, 2009. "Independent agencies: more than a cheap copy of independent central banks?," Constitutional Political Economy, Springer, vol. 20(3), pages 267-295, September.
  7. Berdiev, Aziz N. & Kim, Yoonbai & Chang, Chun Ping, 2012. "The political economy of exchange rate regimes in developed and developing countries," European Journal of Political Economy, Elsevier, vol. 28(1), pages 38-53.

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