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Bureaucratic delegation and political institutions: when are independent central banks irrelevent?

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  • Keffer, Philip
  • Stasavage, David
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    Abstract

    The government's ability to credibly commit to policy announcements is critical to the successful implementation of economic policies as diverse as capital taxation and utilities regulation. One frequently advocated means of signaling credible commitment is to delegate authority to an agency that will not have an incentive to opportunistically change policies once the private sector has taken such steps as signing wage contracts or making irreversible investments. Delegating authority is suggested as a government strategy particularly for monetary policy. And existing work on the independence of central banks generally assumes that government decisions to delegate are irrevocable . But delegation - in monetary policy as elsewhere-is inevitably a political choice, and can be reversed, contend the authors. They develop a model of monetary policy that relaxes the assumption that monetary delegation is irreversible. Among the testable predictions of the model are these: A) The presence of an independent central bank should reduce inflation only in the presence of political checks and balances. This effect should be evident in both developing and industrial countries. B) Political actions to interfere with the central bank should be more apparent when there are few checks and balances. C) The effects of checks and balances shouldbe more marked when political decisionmakers are more polarized. The authors test these predictions and find extensive empirical evidence to support each of the observable implications of their model: Central banks are associated with better inflation outcomes in the presence of checks and balances. The turnover of central bank governors is reduced when governors have tenure protection supported by political checks and balances. And the effect of checks and balances is enhanced in more polarized political environments.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2356.

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    Date of creation: 30 Jun 2000
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    Handle: RePEc:wbk:wbrwps:2356

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    Related research

    Keywords: Environmental Economics&Policies; Economic Theory&Research; Payment Systems&Infrastructure; Financial Intermediation; Markets and Market Access; Environmental Economics&Policies; Financial Intermediation; Inflation; Economic Theory&Research; Economic Stabilization;

    References

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    1. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    2. Weingast, Barry R & Moran, Mark J, 1983. "Bureaucratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(5), pages 765-800, October.
    3. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers, Stockholm - International Economic Studies 595, Stockholm - International Economic Studies.
    4. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(3), pages 651-78, August.
    5. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 869-903, November.
    6. Easterly, William & Levine, Ross, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(4), pages 1203-50, November.
    7. Romer, Thomas & Rosenthal, Howard, 1979. "Bureaucrats versus Voters: On the Political Economy of Resource Allocation by Direct Democracy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 563-87, November.
    8. Cukierman, A. & Webb, S., 1994. "Political Influence on the Central Bank : International Evidence," Discussion Paper, Tilburg University, Center for Economic Research 1994-100, Tilburg University, Center for Economic Research.
    9. Esteban, Joan & Ray, Debraj, 1994. "On the Measurement of Polarization," Econometrica, Econometric Society, Econometric Society, vol. 62(4), pages 819-51, July.
    10. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, Elsevier, vol. 43(8), pages 1569-1593, August.
    11. McCubbins, Mathew D & Noll, Roger G & Weingast, Barry R, 1987. "Administrative Procedures as Instruments of Political Control," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 3(2), pages 243-77, Fall.
    12. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 781-93, May.
    13. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
    14. Baron, David P & Ferejohn, John, 1987. "Bargaining and Agenda Formation in Legislatures," American Economic Review, American Economic Association, American Economic Association, vol. 77(2), pages 303-09, May.
    15. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 911-20, December.
    16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
    17. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 53-84, December.
    18. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
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    Cited by:
    1. Hielscher, Kai & Markwardt, Gunther, 2012. "The role of political institutions for the effectiveness of central bank independence," European Journal of Political Economy, Elsevier, vol. 28(3), pages 286-301.
    2. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.
    3. Kenneth Scheve, 2003. "Public demand for low inflation," Bank of England working papers 172, Bank of England.

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