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Political determinants of central bank independence

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  • Mueller, Till

Abstract

From a normative perspective, it is striking that the degree of central bank independence (CBI) varies considerably across countries. Taking a political economy perspective, this paper demonstrates how different degrees of CBI may be the result of strategic policy-making. While an independent central bank reduces the incumbent politician's chances to influence current monetary policy it also raises the costs of future policy changes for political successors. Hence, when deciding on the degree of CBI, incumbent politicians face a trade-off: current influence on monetary policy versus policy durability. This paper shows how various factors change this trade-off and hence the institutional choice. The model predicts that the level of CBI incumbent politicians choose will increase in politicians' ability to screen central bankers' preferences, in the degree of political polarization, and in the weight politicians place on future policy outcomes. In contrast, the likelihood for the implementation of an independent central bank decreases in the re-election prospects of incumbents and in the utility central bankers receive from holding office.

Suggested Citation

  • Mueller, Till, 2008. "Political determinants of central bank independence," Discussion Papers 2008/19, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:200819
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    More about this item

    Keywords

    Central bank independence; political economy; signaling;
    All these keywords.

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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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